By Leika Kihara and Minami Funakoshi
TOKYO (Reuters) - Japan's economy grew in the first quarter at its fastest pace in a year to mark the longest period of expansion in a decade, thanks to robust exports and a helpful boost from private consumption.
Positive data issued on Thursday should offer some relief to Bank of Japan policymakers, who hope the economy is now gathering enough momentum to drive up inflation that remains stubbornly below their 2 percent target.
Driven by robust exports and firming domestic consumption, Japan's economy expanded an annualised 2.2 percent in January-March, exceeding a median market forecast for a 1.7 percent rise to post the fastest growth rate since January-March 2016, Cabinet Office data showed.
It marked the fifth straight quarter of expansion, the longest growth run since a six-quarter streak through 2006, when the BOJ was exiting from its previous quantitative easing programme on signs of strength in the economy.
"The economy is enjoying comfortable growth driven by both domestic and external demand," said Kyohei Morita, chief economist at Credit Agricole (PA:CAGR).
"Consumer spending remains relatively soft and it has room to improve. But the economy passed the grade both in terms of the pace of growth and the quality of the expansion."
Japan's economic growth in January-March outpaced an annualised 1.8 percent expansion in the euro zone and a 0.7 percent increase in the United States.
DEFLATIONARY PRESSURE PERSISTS
Japan's economy has shown signs of life with exports and factory output benefiting from a pick-up in overseas demand.
But consumer prices are barely rising as firms remain wary of increasing wages, keeping the BOJ under pressure to maintain its massive stimulus despite improvements in the economy.
Nominal GDP, or GDP at current market prices, fell 0.1 percent in the first quarter to mark the first contraction in five quarters, as relatively weak demand prevented many firms from passing on rising import costs to households, underscoring the challenges of eradicating Japan's sticky deflationary mindset.
Private consumption, which accounts for roughly 60 percent of gross domestic product (GDP), increased 0.4 percent in the first quarter on solid demand for smartphones and clothing, posting its fifth straight quarter of increases.
But wage earners' total remuneration fell 0.2 percent in nominal terms from the previous quarter, a sign companies remain reluctant to share much of their profits with employees.
Offshore demand added 0.1 percentage point to growth as exports rose 2.1 percent on rising shipments to Asia and Europe, a sign that improvements in overseas economies underpinned Japan's recovery.
Capital expenditure gained 0.2 percent in the first quarter, confounding market expectations for a 0.4 percent fall.
"The Japanese economy probably won't grow dramatically, but it's not about to shrink either. The global economy is solid and there aren't many domestic downside risks," said Norio Miyagawa, senior economist at Mizuho securities.
"I think the economic recovery will eventually push up wages and prices, but the pace will be slow."