Japan recovery running out of steam

The Japanese economy is close to stagnation, according to revisions to official figures yesterday that cut the estimate of GDP growth to just 0.1 per cent.

The Japanese economy is close to stagnation, according to revisions to official figures yesterday that cut the estimate of GDP growth to just 0.1 per cent.

The figures also showed the economy shrank by 0.1 per cent in April to June from the previous quarter rather than the 0.3 per cent growth preliminary figures had shown.

It is the latest evidence that the recovery in the world's second-largest economy is running out of steam. Julian Jessop, the chief international economist at Capital Economics, said: "Real growth has been essentially flat in the past two quarters."

The slowdown was driven by weakness in consumer spending, exports and investment by companies and the government. The small growth in the third quarter prevented the economy from contracting for the second straight quarter - a technical definition of recession.

Heizo Takenaka, the economics minister, insisted that the economy was still on track for growth and had simply entered a period of consolidation. However, figures from Mr Takenaka's department showed the index of coincident indicators stood below the boom-or-bust 50 mark for the third successive month in October, which some economists said was a sign of an economic downturn.

Graham Turner, at GFC Economics in London, said the feeble recovery, despite a rebound in productivity, had left the economy vulnerable to a surge in the yen as the dollar continued to tumble. He said: "Government officials may choose to blame US profligacy for the trade imbalances [but] the real reason for the emergence of such chronic imbalances has been the impact of corporate restructuring on consumer demand. The immediate fallout for Japan is becoming all too evident - a stronger yen and possible recession in 2005."

The reaction from financial markets was mixed. The Nikkei closed up 0.62 at 10,941.37 after some investors said the GDP figures were better than expected, but most government bond prices rose as the figures backed the market's view that the recovery had passed its peak.