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Japan's growth slows as recovery loses steam

August 16, 2010

Japan's economy grew at the slowest pace in the past three quarters during April-June, data showed Monday, as cooling exports and falling consumption showed the recovery was losing steam.

The data also pointed to the looming prospect of China overtaking Japan as the world's second-largest economy, underlining its growing global clout after becoming the world's biggest exporter, auto market and steelmaker.

While remaining just ahead of China in nominal terms in the first half, Japan slipped behind its Asian rival in the April-June period, government data showed.

"The economy is levelling off," said Keisuke Tsumura, parliamentary secretary of the Cabinet Office.

Japan's real gross domestic product grew by an annualised 0.4 percent in the quarter, down from a revised 4.4 percent in the previous quarter and missing forecasts of 2.3 percent growth from a Dow Jones Newswires poll of economists.

On a quarterly basis, growth was at 0.1 percent, down from a revised 1.1 percent in the previous quarter.

The figures pose a challenge for Prime Minister Naoto Kan's government, which must balance a fragile economy with an agenda focused on the need to cut the industrialised world's biggest public debt, at nearly 200 percent of GDP.

"It was a negative surprise," said Yoshiki Shinke, Dai-Ichi Life Research Institute senior economist. "Such figures were very much unexpectedly weak."

Private consumption, a key driver of the economy, was flat after growing 0.5 percent in the previous quarter.

"The data showed that domestic demand was still very weak. Effects of various policy measures have significantly weakened and pulled down growth," said Shinke.

Many analysts say 2010 is the year China will replace Japan as the world's second-largest economy, with government data showing that while Japan stayed ahead of its Asian rival in the first half, it fell behind in April-June.

On a nominal basis, Japan's gross domestic product was at 2.578 trillion dollars compared to China's 2.532 trillion dollars in the first half, the cabinet office said in a preliminary estimate.

But Japan's second quarter GDP was smaller than China's, at 1.288 trillion dollars compared with 1.336 trillion dollars, according to the government.

Both China's commerce ministry and the National Bureau of Statistics declined to comment.

In June, Japan's unemployment rate edged higher to 5.3 percent, while production of automobiles and electronic gadgets underwent a surprise slip, amid signs that an export-driven recovery may be stalling.

Shipments of cars, gadgets and components have been crucial in offsetting weaker demand at home, but concern is mounting that Japan may be hit by Beijing's efforts to cool China's economy, together with fragile eurozone and US demand.

Deflation and weak domestic demand have long burdened Japan, as consumers tend to put off purchases in the hope of further price falls.

The planned expiry of government incentives to purchase cars in September may also weigh on production for the domestic market just as the overseas climate worsens, analysts say,

Japan's exporters are threatened by a slowdown overseas, cooling a sector that is also anxious about the strength of the yen, which recently touched a 15-year high against the dollar.

The safe-haven currency has strengthened beyond the trading levels assumed earlier by many exporters who have eyed its rise with anxiety, as investors seek a refuge from dollar and euro volatility.

For every one-yen rise in the currency's value against the dollar, companies can lose tens of billions of yen earned overseas when repatriated, threatening a core part of Japan's economy.

"It will take time for the higher yen's effects to show in exports data," said Shinke. "But over six months to a year, it will pressure exports."

In Tokyo the Nikkei 225 index was 0.94 percent lower after the release of the data.

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