Japan's economy grew at its fastest clip in three quarters in April-June, spurred by business investment and surprisingly strong private spending, reinforcing views that a recovery may be starting to get a firmer footing.

Government data yesterday showed that gross domestic product grew 0.6 per cent from the previous quarter for the sixth successive quarter of growth, beating the median forecast in a Reuters poll for growth in the order of 0.2 per cent.

On an annualised basis GDP rose 2.3 per cent, the best turnout since the July-September quarter of 2002.

The figures confirm the recent brighter trend in Japan's economy that has seen business investment and sentiment pick up and stock prices rise, prompting both the government and the central bank to raise their assessments of economic conditions.

"It's definitely positive news and suggests that the expansion is continuing, and if anything things might pick up a bit more in the second half of this year," said Peter Morgan, chief economist at HSBC Securities.

The data will make good reading for Prime Minister Junichiro Koizumi, whose economic management is in the spotlight ahead of a September election to keep his job as leader of the Liberal Democratic Party - and with it the post of prime minister.

"Market concern about a possible recession will recede with the firm GDP data," said Ryutaro Kono, economist at BNP Paribas.

The yen rose briefly, but then retreated with many traders not convinced growth will get much stronger in the near term.

The yen's mild reaction will come as a relief to Japanese authorities, who have been working to hold it down to protect exports, an important but slowing driver of the economy.

The surprisingly strong 2.4 per cent annualised growth in the US economy in the same period may indicate a change for the better in Japan's largest export market, although Germany's is likely to have contracted in the quarter, giving a mixed picture for the world's three largest economies.

Economists said one-off factors such as Asia's Sars outbreak boosted the export component of Japan's GDP figures.

"Net exports were helped greatly by reduced imports, because of a decline in overseas travel due to Sars," said Mamoru Yamazaki, chief economist at Barclays Capital.

"But given a likely recovery in Asian and US economies, I don't think exports will fall into negative territory going ahead."

Spending by Japanese businesses rose 1.3 per cent in the quarter, above the Reuters poll forecast of 0.7 per cent.

Many companies are more confident after earnings in the quarter showed signs of improvement.

Hi-tech firms such as Sharp Corp and Canon Inc benefited from booming sales of digital cameras and liquid crystal display TVs.

Such products helped boost private consumption, which rose 0.3 per cent against poll expectations of a 0.1 per cent fall.

Adding to the brighter picture, the government also revised its figures for GDP in the January to March quarter, saying growth was 0.3 per cent rather than the preliminary 0.1 per cent.

For the fiscal year that ended in March 2003, GDP growth was revised up to 1.6 per cent from 1.5 per cent.

However, people on the streets of Tokyo were far from convinced that life was taking a turn for the better.

Complaining about the economy has become a feature of everyday conversation and yesterday's data did not alter that.

"The state of the economy is terrible. I don't see any real improvement in spending and that means a lot of empty seats," said Tatsuya Negishi, a 55-year old taxi driver.

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