Slower growth for Japan's economy

Is Japan's economy in for another rough ride?

Japan's economic growth has been revised downwards as high oil prices and lower government spending have taken their toll.

The annual rate of expansion for the three months to June was 1.4%, the government said - down from its original 1.7% prediction.

The news took investors by surprise, and helped push the benchmark Nikkei 225 index below 11,000.

But the government said it was still sure that the recovery was on track.

"There is no need for us to alter our view of the economy," said economics minister Heizo Takenaka.

"The trend for consumer spending has not changed, and the reading for capital spending was revised upwards."

Investment slump

Despite the slowdown, the second quarter of 2004 marked the fifth straight three-month period of growth for Japan.

The run of expansion broke a pattern of stagnation and deflation which dogged Japan for much of the previous decade, following the collapse of asset and property prices in the early 1990s.

But the switch in the growth trend - against expectations that the number would be revised up to 3.1% - triggered concerns.

Government investment - which throughout the late 1990s had single-handedly kept the economy afloat - was a key culprit, down 7% from the previous quarter.

The reduction is part of efforts to bring the immense public sector deficit under control.

Also attracting attention were the figures for machinery orders released earlier this week, which showed an 11.3% fall in July, and a recent rise in unemployment.

"It's worse than expected, and combined with the very disappointing machinery orders... I am worried about the outlook for the July-September quarter," said Kisha Murashima, director of economic and market analysis at Nikko Citigroup.

"It's unlikely that we'll see a contraction, but we are seeing clear signs of an adjustment in the speed of the recovery."

On the Tokyo stock exchange, the Nikkei dropped more than 1.5%, while the yen lost more than 0.5% against the dollar.