JAPAN ECONOMY
Shizuo Kambayashi  /  AP
Pedestrians pass by a flagship store of French designer Christian Dior along Tokyo's ritzy Ginza street Thursday, Aug. 10, 2006. Japan's economy grew at a weaker-than-expected 0.8 percent annual rate during the second quarter as exports faltered, but strong company investments kept the expansion going, the government said Friday, Aug. 11, 2006. (AP Photo/Shizuo Kambayashi)
updated 8/11/2006 8:14:28 AM ET 2006-08-11T12:14:28

Japan's economy grew at a weaker-than-expected 0.8 percent annual rate during the second quarter as exports faltered, but strong company investments kept the expansion going, the government said Friday.

Also crimping growth was a plunge in public spending, reflecting reform efforts toward smaller government, but the bulk of the bad news appeared to come from a slowdown in the U.S. economy that chiseled away at Japanese export growth, which had been booming in previous quarters.

Japan's gross domestic product, the value of goods and services it produced, grew 0.2 percent during the April-June period from the previous quarter, marking the sixth straight quarter of expansion, the Cabinet Office said. If that pace continues for a year, the economy would expand 0.8 percent.

Those numbers were worse than the average 0.4 percent on-quarter rise or 1.7 percent annual gain forecast by economists surveyed by Dow Jones Newswires.

Ryutaro Kono, chief economist of BNP Paribas in Tokyo, said Japan's economic growth was likely to slow in coming months but wouldn't slip back into contraction because strong private investment and solid consumer spending would likely keep growth going, despite weaker exports.

"The strong growth Japan achieved last year isn't holding up," he said.

The world's second largest economy has shown signs of revival in recent years after a decade of stagnation. The Japanese economy grew 3.2 percent in fiscal year 2005, which ended in March 2006.

It had grown 1.7 percent in fiscal 2004, and 2.3 percent in fiscal 2003. Tokyo is forecasting 2.1 percent growth for the fiscal year ending March 31, 2007.

In the past, Japan relied mostly on exports, especially to the United States, to keep growth going, but spending by consumers and companies have instead bolstered growth in recent months.

During the quarter that ended June 30, private sector investment jumped 3.8 percent but exports edged up just 0.9 percent, down from their 2.2 percent gain in January-March, as shipments to the U.S. slowed, the Cabinet Office said.

Public investment plunged 4.6 percent, reflecting budget cuts in the national and local governments, although consumer spending held up, at 0.5 percent growth, as households spent on washing machines and other electronic products, as well as on dining out and overseas travel, it said.

Residential investment also slipped, dropping 2.7 percent in the quarter through June from the previous quarter.

Masayuki Goto of the Cabinet Office said spending by corporations and households was supporting the nation's economic growth while the government slashed spending.

"The data confirmed the larger picture of our economy," he told reporters.

Economy Minister Kaoru Yosano brushed off worries about Japan's economic revival, although he warned that the economies of Japan's trading partners must be watched closely.

"The recovery is continuing," he told reporters. "Led by private demand, the household sector and capital expenditures are at solid levels."

Japan has faced the danger of deflation, a continuing drop in prices that deadens economic activity by bringing down wages and profits. Most industrialized nations worry about the opposite danger _ rising prices or inflation.

Japan's central bank kept interest rates at zero since March 2001. But the Bank of Japan raised a key overnight rate to 0.25 percent last month, its first interest rate increase in six years, amid signs of economic recovery. The central bank kept monetary policy unchanged Friday at the end of its two-day policy board meeting.

The government has not yet declared that the danger of deflation is over. Recent data, including the latest from the Cabinet Office, show deflation seems to be easing.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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