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TOKYO (Reuters) - Japan's economy grew more than earlier estimated in the fourth quarter as capital expenditure grew at its fastest in almost three years, welcome news for policymakers as they begin to discuss how to wind down years of massive stimulus.
The economy grew an annualized 1.2 percent in October-December, less than the median estimate for 1.6 percent annualized growth but more than the preliminary reading of a 1.0 percent annualized expansion.
The figure translates into quarter-on-quarter growth of 0.3 percent, versus a preliminary reading of 0.2 percent growth and the median estimate for 0.4 percent growth.
A stronger pace of growth will be a boon to the government as policymakers have been counting on an increase in business investment to drive future expansion and increase low productivity.
However, growth is still not robust enough to generate sustained inflation that the Bank of Japan wants, and the risk of rising protectionism could discourage Japanese exporters from raising wages, seen as key to boosting consumption and economic activity at home.
"The economy will remain in recovery mode, because we are seeing the benefits of capital expenditure from manufacturers and the construction sector," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
"I am a little worried about the strength of consumer spending. I am still not sure how protectionism will materialize, but this is also a potential risk."
Private consumption registered no growth in October-December, the same as preliminary data. Sluggish household spending has kept the country in prolonged deflation and been a key challenge for the BOJ in meeting its 2 percent price goal via its massive bond buying program.
Households cut spending for the 11th straight month in January even as the job market tightened further, separate data showed earlier this month. Private consumption accounts for around 60 percent of GDP.
The capital expenditure component of GDP rose 2.0 percent from the previous quarter, which was more than the forecast for 1.7 percent growth, and faster than the preliminary 0.9 percent.
The revised data showed capital expenditure grew at the fastest since a 2.3 percent quarterly rise in January-March 2014.
Increased investment from the real estate sector, construction companies, food processing companies and electronics makers drove gains in capex, a Cabinet Office official told Reuters.
Some economists expect capital expenditure to increase further as companies will soon have to start investing in more efficient equipment to deal with a shrinking pool of workers as the population ages.
However, U.S. economic policy poses a risk, because companies could suddenly turn cautious on capex if U.S. President Donald Trump adopts protectionist trade policies.
There are also concerns that protectionism could hurt Japan's exports.
After capital expenditure, net exports were the second-biggest driver of growth in the fourth quarter, revised data showed.
However, the plus 0.2 percentage point contribution from net exports was unchanged from preliminary figures, which raises questions about the strength of external demand.
Editing by Jacqueline Wong