Mumbai: Japan's economy, the world's second largest, grew at annual rate of 4.8 per cent in the three months ended December 31, 2006 – the fastest in almost three years – on the top of rising consumer spending and a jump in business investment.

Japan's economy expanded 2.2 per cent in 2006, the fastest in two years against 3.4 per cent growth in the US and a 2.7 per cent growth in Europe.

Gross domestic product (GDP) expanded at rates exceeding analysts' expectations of 3.8 per cent, stoking speculation that the Bank of Japan may raise interest rates. The BoJ board has kept borrowing costs at 0.25 per cent at its last two meetings.

Japan's 0.25 per cent base interest rate is the lowest among major economies, compared with the European Central Bank's 3.5 per cent and the US Federal Reserve's 5.25 per cent.

While spending by households remain flat because of slow wage growth – wages rose 0.2 per cent last year – Japanese firms, which are enjoying the longest profit expansion in more than 30 years, are using money to increase outlays on factories and pay back debt, data show.

And, as the yen gained further ground against the US dollar, chances are that the BoJ will raise rates possibly next week, according to the Credit Suisse Group.

The yen rose to 119.96 per dollar in late Tokyo trading from 120.72 in early trade while yields on the benchmark 10-year bond rose 1.5 basis points to 1.74 per cent. The Nikkei 225 Stock Average also ended 0.8 per cent higher.