Japan cuts growth estimate

Junichiro Koizumo leads his party in a vow to fight on

Japan has revised down its key indicator of economic growth, fuelling fears that the nation is slipping back into recession.

The government admitted that its estimate of gross domestic product in the last three months of the year rose 0.7% rather than 0.8% when compared to the same period the previous year.

Reviving Japan's economy will be a key challenge facing the new leader of the Liberal Democrat party, Junichiro Koizumi who is expected to be voted in as Prime Minister on Thursday.

Japan, the world's second largest economy, began to make a tentative recovery from its eleven-year recession last year.

But the weakening global economic climate, and the US slowdown have squashed hopes of a recovery.

Declining exports

The news comes on the heels of a raft of weaker economic indicators and a series of downgrades of key activity including consumption and exports.

One reason for the downgrade was the fall in exports to the US.

Taro Aso: Recession is a real possibility

"The decline in external demand made a larger contribution to the fall in GDP than anything else," said a government official.

Reduced investment in the private sector by firms also led to lower growth.

Economists say it is looking increasingly difficult for Japan to achieve the government's 1.7% growth target for the current financial year.

But the downgrade is unlikely to significantly affect whether Japan meets last year's growth target of 1.2%.

The revision was also widely expected, and only had a limited effect on financial markets.

Radical reforms

Earlier this month, the government admitted for the first time in more than five years that the economy was weakening.

And Taro Aso, the economics minister in the outgoing government, warned that a slide back into recession was a real possibility.

But Mr Koizumi's victory is seen as a victory for radical reforms and clear-cut economic policies.

He says he is prepared to risk short-term economic pain, including higher unemployment, in order to achieve long-term benefits.