Japan GDP revised up, rate rise still seen likely

TOKYO, June 12 (Reuters) Japan's economy grew more than initially estimated in the first three months of this year, providing further evidence of a solid recovery that may encourage the Bank of Japan to soon end an era of zero interest rates.

The economy grew 0.8 percent in January-March in real price-adjusted terms from the previous quarter, higher than an initial reading for a 0.5 percent expansion but matching economists' consensus forecast.

The revision translated into annualised growth of 3.1 percent, compared with a preliminary reading of a 1.9 percent expansion, the government data showed on Monday.

The figure cemented market expectations that the BOJ would raise interest rates for the first time in six years as early as July despite a slide in share prices in the last month.

''The revised GDP growth is in line with expectations and will not affect the outlook for the BOJ's monetary policy,'' said Tatsuo Ichikawa, chief strategist on Japanese government bonds at ABN Amro Securities.

''The revised figure confirms that the recent stock market falls won't prompt the BOJ to change its stance or prevent it from raising interest rates,'' he said.

The Nikkei stock average has fallen 18 percent from its peak in April, hitting its lowest level since November last week. It was little changed in late morning trading on Monday.

Shares have been on the decline on concerns that tighter monetary policy by central banks around the world may slow economic growth worldwide.

Japanese government bonds fell on Monday amid caution ahead of a BOJ policy meeting on Wednesday and Thursday. But traders expect no policy shift this month.

FIRM DOMESTIC DEMAND Japan's economy has been enjoying a steady recovery over the past few years as companies regain strength after years of painful restructuring. They are now paying more to their employees and hiring more, supporting personal consumption.

The economy is in its second-longest growth cycle of the postwar era, outlasting the 51-month ''bubble'' boom from December 1986 to February 1991.

If the recovery runs until November, it will surpass the ''Izanagi'' boom of the late 1960s, named after a god in an ancient myth about the birth of the nation.

Economics Minister Kaoru Yosano said on Sunday on a television programme that Japan's economy remains firms despite recent falls in Tokyo share prices, and he remained confident that the recovery would outlast the Izanagi boom.

The breakdown of GDP data showed the upward revision was mainly due to higher capital spending, which rose 3.1 percent in January-March against an initial reading for a 1.4 percent rise.

The GDP deflator -- a measure used to derive real GDP from nominal GDP by adjusting for price changes -- fell 1.2 percent from a year earlier.

Despite recent rises in consumer prices, the government is not yet convinced the economy has fully emerged from debilitating deflation. It is watching the GDP deflator, along with other data, to confirm if sustained falls in prices have ended.

''There is no change in our view that deflation continues, although there is some improvement,'' top government spokesman, Shinzo Abe told a news conference on Monday after the data release.

Because imports are subtracted from exports to derive net exports, recent higher oil prices have also put downward pressure on the overall GDP deflator.

But the domestic demand deflator, which had been falling for most of the past eight years, improved to a plus 0.1 reading in January-March, yet another sign of improving price conditions.

Separate data showed the corporate goods price index (CGPI) in May rose 3.3 percent from a year earlier, boosted by persistently high oil and raw materials prices.

Higher oil prices have been narrowing Japan's trade surplus.

Data also showed on Monday that Japan's trade surplus was down 32.4 percent in April from a year earlier at 755.6 billion yen (.62 billion), while the current account surplus was down 20.2 percent in April from a year earlier at 1.2823 trillion yen.

Reuters MA VP0843