Japan's economy probably expanded at a 3.8 per cent annual pace in the first three months of the year as lower unemployment spurred consumer spending, economists said.

The growth forecast by a Bloomberg News survey of 25 economists is double the pace predicted in February and follow's the fourth quarter's 6.4 per cent, the fastest in 13 years.

The report will be released by the Cabinet Office today.

Growing overseas sales are prompting companies, including Toyota Motor Corp, to hire more Japanese workers, pushing unemployment to a three-year low of 4.7 per cent in March. With better job prospects, consumers are spending more, helping to extend the recovery in the world's second-largest economy to a fifth quarter.

"Improvement in employment has been driving consumer confidence," said Ryota Sakagami, an economist on Nomura Securities Co's economic research team. "Consumer spending was strong in the first quarter."

Consumer spending, the missing element in recoveries from the past two recessions, is helping to pull Japan out of a slump that started in 1991 when its asset-price bubble burst.

"The economy is now growing in a more sustained way than it has for very many years and deflation is beginning to recede," John Taylor, US Undersecretary of the Treasury, said during a trip to Tokyo last week.

Spending by households headed by a salaried worker rose a seasonally adjusted 2.9 per cent in the first quarter, the first gain since the second quarter of 2003, the government said last month.

Consumer confidence rose to its highest in more than three years in the quarter.

"Growth has been balanced between overseas and domestic demand," said Osamu Tanaka, an economist at Morgan Stanley Japan Ltd. "Personal consumption is finally starting to pick up."

Gains in spending and confidence have helped retailers including supermarket operator Aeon Co. Sales at Aeon rose 15 per cent to 3.56 trillion yen (US$31 billion) in the business year ended February 20.

Economic growth has helped Japan's stock indexes mark their biggest fiscal year gains in 31 years. The Nikkei 225 Stock Average gained 47 per cent and broader Topix index rose 50 per cent in the year ended March 31, snapping three years of declines.

"Everyone definitely thinks the economy is on the up," Aeon President Motoya Okada said in Tokyo last month. "Compared with the last 10 years, it's a big change."

Japanese are buying or remodeling homes at a faster pace.

Housing investment, which accounts for about 4 per cent of the economy, probably rose 1 per cent from the previous quarter, according to the survey.

Net exports, or exports minus imports, probably contributed 0.3 percentage point of first-quarter growth, according to the median forecast of 20 economists surveyed. Exports to China and the US, Japan's largest overseas markets, will continue to grow as the global economy recovers, economists say.

The US economy, the world's largest, will probably grow 4.7 per cent this year, the fastest pace in two decades, the Organization for Economic Co-operation and Development said last week. China's economy will grow 8.3 per cent, it said, and Japan's will expand 3 per cent, more than a November forecast of 1.8 per cent growth.

Japan's GDP deflator, a measure of price changes that is used to calculate the difference between nominal and real gross domestic product, probably fell 2.4 per cent in the first quarter, the 24th drop, the survey showed. Nominal GDP, which isn't adjusted for price changes, probably rose 0.4 per cent, economists said.

Bank of Japan Governor Toshihiko Fukui has pledged to keep pumping money into the economy and maintain borrowing costs near zero to stem six years of falling prices. Declines in core consumer prices, the price measure the central bank uses to assess deflation, have stemmed their falls in recent months.

Still, Fukui says the battle is not yet over.

"The distance to overcome deflation may look short, but it's not as short as it seems," Fukui said last week.

Japanese Finance Minister Sadakazu Tanigaki at the weekend said the government would work with the central bank to defeat deflation.

"As our economy remains in a mild deflationary phase, it is essential that the government and the Bank of Japan will continue to work together to take effective and comprehensive measures to overcome this deflation," he said at a meeting of the Asian Development Bank in South Korea.

Economists including Eishi Yokoyama say that gains in consumer spending may not be sustained because companies are still reluctant to raise wages. Wages have fallen for nine months to March, when they had their biggest drop since December 2002.

They have risen for two months since February 2001.

"While companies have done their first round of cost cuts, they're not in a position to increase costs" by boosting wages, said Yokoyama, of AIG Global Investment Corp, which manages about US$3.5 billion in Japan. Falling wages "signal that we're not going to see a sustainable recovery in consumer spending."

(China Daily 05/18/2004 page12)