Shares higher

The news means that Japan outpaced the US economy, which posted annual growth of 1.6 per cent in the same period.

Junichi Makino, senior economist at Daiwa institute of research, said the figures "show that the recovery remains intact, particularly in the corporate sector".

Some pessimistic economists had even predicted negative growth in Japan due to weakness in domestic demand, so investors breathed a sigh of relief that the recovery remained on track.

The strong performance led Japanese shares higher. The Nikkei 225 index closed 1.67 per cent higher. The US dollar, meawhile, fell to 117.66 yen in late Tokyo trade from 118.22 yen in New York on Monday.

There were more positive data for Japan when growth for the quarter to June was also revised up to 0.4 per cent from 0.2 per cent previously, giving an annual rate of 1.5 per cent.

Rate rise

The government is expected to report this month that Japan is in the midst of its longest period of sustained growth since the second world war as the economy finally emerges from its deflationary torpor.

But growth has slowed sharply from the one per cent, quarter-on-quarter pace clocked in the last three months of last year and the 0.8 per cent expansion in the first quarter of this year.

Analysts said that a weaker growth snapshot would have made it harder for the Bank of Japan to justify raising interest rates again, particularly after an unexpected slump in machinery orders revealed last week.

Koji Omi, Japan's finance minister, welcomed the robust third-quarter performance.

"Generally, the economic recovery is continuing," he said.

The Bank of Japan is expected by many economists to leave interest rates unchanged at 0.25 per cent at the end of a policy meeting on Thursday, where they have been since July, but a growing minority of analysts now predict a raise in December.