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Japan’s
economic growth slowed to a crawl in the second quarter and analysts
see more weakness ahead, adding to policymakers’ headaches as they
grapple with deflation and a rise in the yen that threatens an
export-reliant recovery.

Slowing growth in
main export destinations such as the United States and China clouds the
outlook, while policymakers are trying hard to talk down the yen after
it surged to a 15-year high against the dollar last week.

Japan’s quarterly
gross domestic product growth of 0.1 percent translates to annualised
expansion of 0.4 percent, well below the median market forecast of 2.3
percent and the United States’ 2.4 percent annualised growth in the
same quarter.

That followed
revised 4.4 percent annualised growth in the first quarter, when both
exports and a stimulus-driven recovery in consumption contributed to
overall growth.

In the April-June
quarter, the stimulus effects have worn off, leaving exports as the
sole engine of growth and with its contribution to growth halved to 0.3
percent, the economy just eked out a third straight quarter of
expansion.

Prime Minister,
Naoto Kan, and Bank of Japan governor, Masaaki Shirakawa, are expected
to meet later this week to discuss the yen’s strength and possible
responses, although analysts said there is not much they can do.

“I think the Bank
of Japan and the government need to take decisive action against
currency moves. Solo currency intervention is possible if the yen
approaches 80 to the dollar. If that is accompanied by monetary easing
by the Bank of Japan, it may have a certain effect,” said Takeshi
Minami, chief economist at Norinchukin Research Institute in Tokyo.

China leap-frogs ahead

The latest figures
put China ahead of Japan as the world’s second-largest economy for the
quarter on a nominal dollar basis, said Keisuke Tsumura, a
parliamentary secretary at the Cabinet Office. He added, however, that
one should wait for full-year figures before changing the rankings.

“Since we have
different calculations for seasonal adjustments, it would be correct
and fair to compare the figures for the whole year,” Tsumura said.

Japan’s
second-quarter GDP before seasonal adjustments totaled $1.2883 trillion
against China’s second-quarter unadjusted GDP of $1.3369 trillion, he
said.

China’s top currency regulator said last month that his country’s economy had already overtaken Japan’s.

Japanese government
bond futures jumped after the weak data, with September 10-year futures
rising 0.28 point to 142.67, their highest since June 2003, while
benchmark 10-year yields slipped to a seven-year low of 0.950 percent.
The Nikkei stock index .N225 fell nearly 1 percent.

“The economy may
enter a lull late this year or early next year, or even stagnate. Much
depends on the performance of overseas economies,” said Yoshiki Shinke,
senior economist, Dai-Ichi Life Research Institute.

Concerns of Rising Yen

Analysts added that
the rise in the yen, which climbed to 84.72 per dollar, may begin to
pinch export growth in the latter half of the fiscal year to next March.

Kan has expressed
concern about the yen’s strength and government sources said he may
meet the central bank governor as early as this week to discuss the
matter.

“We need to look at
this closely, and that includes the currency problem. I have asked
cabinet ministers involved to report to me about the economic
situation,” Kan told reporters when asked whether the GDP data showed
the economy needed new stimulus measures.

Late last year, the
last time the yen strengthened beyond the 85 yen mark, the BOJ called
an emergency meeting and announced a three-month funding scheme, a day
before Shirakawa met with the then-prime minister, Yukio Hatoyama.

The yen has risen
steadily against the dollar since early May, gaining more than 10
percent and closing in on its 1995 record high of 79.75 per dollar,
prompting markets to speculate that Tokyo might take action.

But currency market
intervention is seen as difficult, whether jointly or alone, although
market players said the risk of solo action increases the closer the
yen gets to 80 per dollar, and if its rise accelerates to a pace of 2
to 3 yen per day.

Investors see a monetary policy response from the BOJ as more likely than currency intervention.

Signs of a
faltering economy put more pressure on Kan, ahead of his party’s
leadership vote next month, in which he may face a challenge from
powerbroker, Ichiro Ozawa, or a proxy, either of whom would be less
keen to forge ahead with fiscal reform.

Japan’s recovery
has been spotty since emerging from its worst recession since World War
Two in mid-2009, relying heavily on exports, particularly to Asia, and
government stimulus for spending on energy-efficient cars and
electronics.