Real gross domestic product rose 0.4% in annualized terms in the April-June period, the slowest pace in three quarters and down from a revised 4.4% increase in the January-March quarter, the Cabinet Office said Monday. GDP grew 0.1% compared with the previous quarter, when it rose a revised 1.1% on quarter.
The data add to widespread concerns that Japan's fragile economic recovery may be running out of steam as growth in key export markets also slows. The weak numbers also come just as China looks set to overtake its east Asian neighbor as the world's second largest economy.
But it also comes as Japan faces pressure to tame its massive public debt, making new government stimulus efforts unlikely for now.
Japan's nominal GDP dropped 0.9% on quarter, or an annualized 3.7%, to 118.538 trillion yen, or $1.288 trillion. That was below China's nominal GDP of $1.337 trillion in the quarter.
China's nominal quarterly GDP has twice previously been greater than Japan's in dollar terms—in the fourth quarters of 2008 and 2009—although its nominal GDP in 2009 was still below Japan's at $4.98 trillion compared with the island nation's $5.07 trillion. Still, economists say current growth trends suggest China could surpass Japan in 2010.
Private consumer spending, which accounts for nearly 60% of Japan's GDP, was flat in the April-June period, compared with a revised 0.5% growth in the previous quarter.
A recovery in wages, as summer bonuses rose after sharp cuts last year, kept spending from slowing further. But the low levels persisted in part as a weak jobs market weighed on consumer sentiment. In June, the unemployment rate hit a seven-month high at 5.3%.
Deflation also continued to drag on economic growth. Persistent price falls encourage consumers to defer purchases as they wait for prices to fall even further. They also hurt business investment by weighing on firms' bottom lines and increasing real borrowing costs.
The GDP deflator, the broadest measure of price trends, was minus 1.8% during the April-June quarter. The result represents a mild improvement from the minus 2.8% in the previous quarter, as price falls have eased slightly. But it still underscores how deeply entrenched deflation is in Japan.
Corporate capital investment rose by 0.5% in the April-June period, following a 0.6% rise in the previous quarter. While the result marked the third straight quarter of gains, economists say recent weakness in leading indicators of spending suggest business spending, which accounts for 16% of GDP, may moderate for the rest of the year.
Domestic demand subtracted 0.2 percentage point from GDP growth, compared with the 0.5 percentage point it added in the previous quarter. Despite the negative result, some analysts said they expect business spending and consumption to improve in the coming months.
The contribution to GDP from external demand, or exports minus imports, was at 0.3 point in April-June from a revised 0.6 in the previous quarter.
Further clouding the outlook for Japanese exports is the recent strengthening of the yen. The dollar fell last week to 84.72 yen, its lowest since July 1995. A strong yen makes Japanese products less competitive overseas and eats into revenue sent back to Japan.