Japan's consumers are again getting a taste for spending

According to the Cabinet Office, gross domestic product (GDP) will increase by 2.1% in the year to 31 March 2007, up from a earlier target of 1.9% growth.

The move will fan expectations that the Bank of Japan is set to raise interest rates for the first time in six years.

Especially as a key measure indicated that price growth may have returned.

Changing scenario

Japan has been wrestling with more than a decade of slow growth and recession that has hit companies and consumers alike.

However, in the past year there have been increasing signs the economy has pulled itself out of the trough.

During the 12 months ending 31 March 2006, Japan's economy grew by 3.2%, its fastest rate of expansion in 15 years.

We need to make economic growth sustainable while inflation concerns are low Finance Minister Sadakazu Tanigaki

At the end of June government figures showed that prices rose 0.6% in May compared with the same period in 2005, the seventh consecutive monthly rise.

As a result, the BOJ has indicated that its will have to raise interest rates from their zero level to control price growth as economic conditions improve. Most analysts expect a quarter of a percentage increase by the end of the August.

Friday's higher growth forecasts "reflect signs that domestic demand, mainly from households and companies, is firmer than we initially expected", the Cabinet Office said.

The government also said its GDP deflator, which reflects price growth within the economy, was positive for the first time since the year ending 1998.

Strong support

Despite the upbeat outlook, the government has been urging the central bank - which is an independent authority - not to act too quickly to control price growth for fear that it will slam the brakes on the economic recovery.

"We need to make economic growth sustainable while inflation concerns are low," said Finance Minister Sadakazu Tanigaki. "I believe it's necessary to firmly support the economy through monetary policy."