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Last Updated: Friday, 8 December 2006, 07:36 GMT
Japanese economy suddenly slows
Japanese production line worker
Japan has been emerging from a decade of economic problems
Japan's economy has grown more slowly than predicted, figures show, raising question marks over the impact of higher interest rates on its recovery.

Government figures said gross domestic product (GDP) in the July to September period was up 0.8% on a year ago, compared with the 2% forecast earlier.

A separate report showed that machinery orders, a measure of economic activity, rose less than expected in October.

Japan has been emerging from a decade of stagnation, recession and deflation.

'Weak report'

The Bank of Japan has raised interest rates from almost zero as the world's second-largest economy has gained in strength.

Many analysts had expected another interest rate increase this month, however, the disappointing economic figures may see the central bank now delay the increase, analysts said.

"It was a weak report," said Hiroshi Shiraishi, an analyst at Lehman Brothers. "For the Bank of Japan it does reduce the chance of a December hike but does not completely rule it out."

The Bank of Japan raised its interest rates to 0.25% in July.

The government said that the main reason for the disappointing economic figures was a drop in domestic demand, which contracted by 0.2% from the previous three-month period.

Economy Minister Hiroko Ota played down any fears that the recovery in the world's second-largest economy was wobbling.

"Although the economy shows some signs of slowing, there is no worry about the economy going back to recession or hitting a soft patch," she said.

"The lower GDP was mainly caused by weak consumption. I don't have any concerns that the economy will fall into a downward trend."

In its report on machinery orders, the Cabinet Office said that they rose by 2.8% in October from the previous month, less than many analysts had forecast.

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