Japan's economy grew less than initially estimated in the second quarter as companies cut capital spending due to growing signs that Europe's sovereign debt crisis and a slowdown in China's economy are denting global demand.
Gross domestic product (GDP) rose a revised 0.2 percent in April-June from the previous quarter, less than the median 0.3 percent forecast and the government's preliminary estimate of 0.3 percent expansion.
The data are another sign the boost to domestic demand from spending on rebuilding of the tsunami-ravaged northeast is waning and policymakers may need to take action in coming months to bolster growth.
"Support from reconstruction demand was not as strong as we had previously expected," said Yuichi Kodama, chief economist, with Meiji Yasuda Life Insurance in Tokyo.
"Japan's economy is probably at a standstill in July-September as the overseas economy has been slowing more rapidly than expected."
On an annualized basis, the economy grew 0.7 percent, below the median estimate of 1.0 percent and half of the preliminary rate of 1.4 percent, according to Cabinet Office data on Monday.
However, quarter-on-quarter capital expenditure growth was revised down less than expected to 1.4 percent from 1.5 percent, compared with a 0.9 percent forecast by economists.
In a sign of slackening foreign demand for Japanese goods caused by the eurozone debt crisis and China's slowdown, the July current account surplus came 40.6 percent below year-ago levels, reflecting a drop in exports.
However, due to a slower rise in imports, the fall in the surplus to 625.4 billion yen ($8 billion) was less pronounced than the forecast 56.8 percent drop to 455.0 billion.
Japan's economy has so far outpaced growth of most G-7 countries on solid private consumption and reconstruction spending. But exports in July posted the sharpest annual drop in six months, in line with trends seen in other export-driven Asian economies, casting doubt on Japan's recovery prospects.
The Bank of Japan holds its next rate review on Sept. 18-19. Many market players expect the central bank will hold off on an easing until Oct. 30, when it reviews its long-term economic and price forecasts in a semi-annual outlook report.
"The Bank of Japan is expected to implement additional easing steps in September or in October as the economy has been weaker than the bank's assessments. If the yen appreciates sharply, depending on Fed moves this month, the BOJ may have to take action," said Meiji Yasuda's Kodama.
Should the economy require more fiscal stimulus, the policy response could be delayed as policymaking has ground to a halt due to a stand-off between the ruling and opposition parties.
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