Government stimuli and vigorous exports made Japan the fastest-growing economy in the Group of Seven leading industrial nations for the second successive quarter, yet the Government stands ready to admit that the country has toppled over the precipice and into deflation.

Analysts said there was a “darker side” to Japan’s surprise rebound from recession and that, almost certainly, its current growth rates would be impossible to maintain.

The GDP growth rate in the world’s second-largest economy — a status that it is expected to lose to China soon — was 1.2 per cent stronger than in the previous quarter, translating into an annualised growth rate of 4.8 per cent and making it the second straight quarter of growth after Japan emerged from recession this year.

Julian Jessop, of Capital Economics, said that, while it was clear that annualised growth of 4.8 per cent was unsustainable, there was plenty of life left in Japan’s recovery. Japanese growth, he said, was no longer only about exports, but the country would benefit from a sustained improvement in economic fortunes across Asia.

The GDP surge, other observers argued, showed that, while Japan led the developed world into recession, it was also leading the way out.

The more cheerful set of growth numbers come amid agitation over the future of Japanese government bonds and what some believe could portend a sovereign default.

However, the growth figures had a leaden counterweight. The domestic demand deflator — a key indicator of deflationary risk that measures price changes for the domestic economy — fell 2.6 per cent from the previous year, its steepest decline for more than half a century. It triggered Cabinet Office deliberations over whether the time had come to declare that Japan was back in deflation.

The threat of a return to the deflationary wilderness of falling prices and, critically, price expectations, led to a flat session on the Tokyo bourse. It was Japan’s long struggle to shrug off deflation in the 1990s that generated the concept of a “lost decade”.

Continuing stimulus efforts have succeeded in making some consumers feel happier about spending, but Richard Jerram, chief Japan economist at Macquarie Securities, said that the composition of Japan’s GDP had improved. Exports still contributed substantially to growth, but private domestic demand swung significantly from negative to positive territory.

Naomi Fink, a strategist for the Bank of Tokyo Mitsubishi, said that there was a “darker side” to Japanese GDP and that positive domestic demand still depended on price declines. She said that consumption only expanded because prices were cut.

The Government appeared keen to downplay the strength of yesterday’s report and indicated that the new growth rate would not cause any pull-back on state efforts to stimulate the economy. “There is no change in the severe condition of the country’s economy,” Naoto Kan, the Deputy Prime Minister, said. “We are concerned about whether the economy falls into a deflationary situation.”

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