By HANS GREIMEL
The Associated Press
Thursday, May 17, 2007; 3:49 AM

TOKYO -- Japanese economic growth slowed to a 2.4 percent pace in the first quarter as businesses cut back on investment amid worries about a slowdown in the United States, Japan's biggest export market. But economists agreed that Japan's overall growth was still healthy and seemed to be stabilizing.

The gross domestic product figures, released Thursday by the government, also came after an unusually strong October-December quarter, when the economy surged ahead at a 5 percent annual pace.

"It is a mistake to interpret it as poor figures being a sign of a new trend," said Richard Jerram, chief economist for Macquarie Securities in Tokyo. "Growth seems to be stabilizing at a solid healthy rate, without major fluctuations in either direction."

Economists said figures would likely discourage any immediate interest rate hike, but would not derail the Bank of Japan from pursuing future increases.

Just hours after the figures were released, the central bank said after a regularly scheduled policy meeting that it was keeping its benchmark rate at 0.5 percent.

"The headline figures today are consistent with the BOJ argument that overall growth is healthy," said Masamichi Adachi, senior economist with JP Morgan Securities in Tokyo. He forecasts the next hike in August to 0.75 percent.

Leading growth in the first quarter was consumer spending, which accounts for more than half the economy. It climbed 0.9 percent from the previous quarter, but the pace of expansion slowed too, from 1.1 percent in October-December.

Exports also helped offset slowdowns in business investment, shooting up 3.3 percent. They rose a meager 0.8 percent in the previous quarter.

"While this is relatively good news, there are still areas of concern," Adachi said.

He highlighted the 0.9 percent drop in business investment in the January-March quarter, a sharp reversal from the 2.3 percent increase the previous quarter.

Capital expenditure has climbed for the past four years, and it was only natural that the investment would taper off, Adachi said. Still, the decline is worrisome because business investment has helped fuel Japan's economic comeback from more than a decade of economic stagnation.

Japan is also vulnerable to a possible slowdown in the United States, which just last month reported its worst economic growth in four years: crawling at a 1.3 percent pace in the opening quarter of 2007.

Compared to the previous quarter, the Japanese economy grew 0.6 percent, the Cabinet Office said. If maintained for a full year, the economy would grow 2.4 percent, just below the 2.6 percent forecast by economists surveyed by Dow Jones Newswires.

Japanese Economy Minister Hiroko Ota said the figures still reflected a healthy economy and were further evidence Japan's economy "overall is recovering."

The BOJ last changed the benchmark interest rate in February, doubling it to 0.5 percent from 0.25 percent. The central bank has said it will raise rates only after it was clear the country has overcome deflation, or a spiral of falling prices.

Cabinet Secretary Yasuhisa Shiozaki said the economy is continuing to recover, and urged policies to prevent the country from lapsing back into deflation.

"The BOJ and the government need to work as one to fulfill that task," he said.