TOKYO: Japan's economy grew at the strongest pace in more than two years in the latest quarter, smashing market forecasts and extending a recovery from the worst downturn in decades, data showed Monday.

The world's second largest economy posted a second straight quarter of positive growth as it emerges from a severe year-long recession on the back of rebounding exports and the government's massive stimulus spending.

The economy expanded 1.2 percent in July-September from the previous quarter -- 4.8 percent on an annualised basis, the government reported. It was the best performance since January-March 2007 and about twice as fast as expected.

"There is no doubt that the Japanese economy is recovering, led by exports," said Naoki Murakami, chief economist at Monex Securities.

But after such a strong performance, there is a risk growth could stall temporarily in the fourth quarter, he warned.

Exports soared 6.4 percent quarter-on-quarter in July-September, while corporate capital expenditure rose 1.6 percent and household spending went up 0.7 percent.

Analysts said the strong performance was also partly due to a temporary boost from corporate inventory restocking.

"Although the GDP figure is really strong, we need to discount the positive contribution made by private inventories because it's not sustainable," said Kyohei Morita, chief Japan economist at Barclays Capital.

"Although Japan's GDP growth will slow I don't think we'll see a double dip (recession). We will be able to avoid that with private capital expenditure finally bottoming," he added.

Japan sank into recession in the second quarter of 2008 as the global economic downturn battered demand for its cars, electronics and other exports.

The economy returned to positive growth in April-June of this year, expanding 0.7 percent quarter-on-quarter, but there are concerns the recovery could lose steam as the boost from the government's pump-priming efforts fades.

With the ageing and shrinking population dimming the outlook for consumer spending, Japan remains as dependent as ever on foreign markets to drive growth, although the new government has pledged to stimulate domestic demand.

Renewed deflation is seen as a risk to the recovery, with the central bank predicting three straight years of falling consumer prices.

Japan's economy should enjoy a "sustained recovery into October-December and onwards" but growth will slow to 0.2 percent quarter-on-quarter in the fourth quarter of this year, Calyon economist Susumu Kato predicted.

Other recent data have also painted a picture of an economy that is slowly getting back on its feet, with the unemployment rate falling to 5.3 percent in September and factory output rising for a seventh straight month.

The Bank of Japan announced last month it would wind down some of its emergency stimulus measures, but held its key lending rate at 0.1 percent and pledged to continue a highly stimulative monetary policy.

"Global financial markets have increasingly been showing signs of improvement, and the global economy has started to pick up," BoJ governor Masaaki Shirakawa said in a speech to a financial forum Monday.