By David Pilling in Tokyo and Krishna Guha in Washington
Wednesday, November 15, 2006
 
Japan grew more strongly than expected in the third quarter, with solid exports more than offsetting weak domestic consumption to produce real annualised growth of 2 per cent.

The better-than-expected figure, which more than doubled market forecasts of 0.7 per cent, sent the Nikkei average up 1.67 per cent to 16,289.55, its biggest percentage gain for six weeks.

The good news on Japan's growth came as new data showed a sharp fall in pipeline inflation pressures in the US, and revealed that retail spending in recent months has not been as robust as previously thought.

While retail spending excluding gasoline came in higher than expected in October, the overall profile was weaker, with downward revisions to previous months. Core US producer prices, meanwhile, fell at their most rapid rate in 13 years, raising hopes of lower consumer price inflation and triggering a rally in the bond market.

In Europe, gross domestic product in the 12-country Eurozone region rose by 0.5 per cent in the three months to September, after a 0.9 per cent rise in the previous quarter, fitting the European Central Bank's view that eurozone growth remains robust in relation to capacity.

The ECB is almost certain to raise its main interest rate by another quarter percentage point to 3.5 per cent in December, but has kept options for 2007 open.

The Japanese growth numbers appeared to vindicate the view of Toshihiko Fukui, Bank of Japan governor, that the economy remained robust, said Jesper Koll, economist at Merrill Lynch.

Mr Fukui has made it clear that the central bank will not hesitate to act pre-emptively against inflation, though he has also said that interest rates will remain low for some time.