Japanese stocks staged a spectacular leap yesterday as trading floors absorbed a “baffling” surge in GDP growth and wildly conflicting signals from the world’s second-biggest economy.

Economists at the major investment banks were left flummoxed by government figures showing that the GDP of Japan — recently a mire of bearish sentiment — grew at an annualised 3.7 per cent over the October-to-December quarter of last year.

The figures were welcome relief to investors, who had begun to fear that Japan would be the first important economy to slide into recession as the US sub-prime mortgage crisis took its toll.

Glen Maguire, the chief Asia economist for Société Générale, complained that the numbers were impressive but incongruent with every other fundamental indicator of the Japanese economy.

Behind the headlines, analysts said, the GDP report was riddled with “red flags” as the global economy slows and Japan’s exporters begin to feel the effects.

One reading sent an especially grim message on consumer spending: strip away the spending on heating oil and warm coats that related to an unseasonable cold snap, and Japan could be heading back to its dark days of deflation.

“Every now and then Japan produces an economic number that prints diametrically opposite to what common sense would suggest,” Mr Maguire wrote in a circular to clients.

Other economists suggested that the government numbers, which were only the preliminary estimate of GDP growth, may eventually be revised lower.

As well as dwarfing consensus analyst forecasts of only 1.5 per cent GDP growth over the period, the 3.7 per cent advance in the economy flew in the face of every recent comment on the growth outlook by the Government itself.

Hiroko Ota, the Economic and Fiscal Policy Minister, was quick to follow yesterday’s report with a repeated warning of “rising downside risks” to Japanese growth.

Recent economic data have provided brokers with a seemingly endless string of “sell” signals.

Consumer sentiment has tumbled hard, salaries have risen anaemically and the country’s massive small and medium-sized corporate sector has begun to cut jobs.

Many economists said that because of the many distortions inherent in real Japanese GDP data, the nominal GDP figures would make a “less aberrant” indicator to focus on.

Nominal GPD advanced by only an annualised 1.2 per cent over the period.

But stock investors, who have watched helplessly as the Japanese market has plunged by nearly 20 per cent on fears of a global economic slowdown, took the news as a rare glimmer of hope: Japan, said traders at Mitsubishi UFJ Securities, may be showing more resilience than most feared.

Shares in the Nikkei 225 soared more than 4 per cent to mark their biggest single-session gain for nearly six months.

Exports to Asia were considerably better than expected, but the big surprise in the GDP numbers, said Kenichi Kawasaki, chief Japan economist for Lehman Brothers, was the strength of capital spending — particularly since the Bank of Japan’s most recent Tankan survey of Japanese business sentiment indicated that that would be precisely where Japan’s downturn would begin.

Ryota Sakagami, a Nomura economist, dismissed the rally as a temporary phenomenon and made no changes to his downbeat forecasts for the remainder of this year.

He said: "With the export environment likely to soften and consumer spending showing no signs of picking up in earnest, we see little prospect of continued robust economic growth driven by capex alone.”

Equally difficult to explain was the rate of decline in housing investment.

Overall, the Japanese construction sector has been mangled by a new building standards law that caused thousands of building projects to be suspended or abandoned altogether.

Since the law was introduced last autumn, housing starts have dipped by more than 40 per cent but housing investment has tumbled by only 21 per cent.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive