16 August 2010 Last updated at 05:16 ET

Japan GDP figures show sharp slowing of economic growth

Japan relies on exports for growth but the strong yen is making that more difficult

Economic growth in Japan weakened significantly in the last financial quarter, official figures show.

Between April and June this year gross domestic product - the sum of the nation's goods and services - grew by 0.1%, much lower than expected.

Analysts say the country's export-led recovery appears to be faltering as the value of the yen appreciates.

Germany and the US recently reported far superior GDP figures for the same period.

Germany registered a 2.2% rise, while the US economy grew at an annualised rate of 2.4%.

The BBC's Roland Buerk in Tokyo says Japan remains one of the wealthiest and most prosperous countries in the world, but the trajectory of its economy has been clear for years.

World Bank figures show that in the first eight years of this century Japan's economy expanded by just 5% while China's grew by 261%.

The GDP figures give further credibility to the widely held belief that China will soon overtake Japan as the world's second biggest economy.

Analysis

Roland Buerk BBC News, Tokyo

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Japan remains one of the wealthiest and most prosperous countries in the world, but the trajectory of its economy has been clear for years: Japan has been stagnating.

Japan has relied on exports for growth. The problem is that the yen has been rising, making Japan less competitive abroad.

Demand at home has been pretty weak too, and the big reason why is deflation. In June deflation was running at 1%. Prices getting cheaper discourages people from spending in the long term and it discourages people from investing too.

Japan recovered from the recession pretty well but there are fears that it could be faltering now. The government and the authorities here are worried. The Bank of Japan has kept interest rates super low at 0.1% in the hope that that will encourage people to borrow.

The problem is, in a stagnant economy people don't want to take on loans, however much they cost.

That will become clearer early in 2011, when GDP figures for the whole of 2010 become available for each country.

Japanese shares closed lower after the announcement, with the benchmark Nikkei 225 index falling 0.6% to 9,196.67.

'Short-termism'

Dr Seijiro Takeshita, director of Mizuho International, said Japan's government had made a mistake in its policy choice.

"The problem for Japan was they were going for short-termism as far as policy was concerned. They were trying to put a bandage over a deep wound," he told the BBC.

"Private consumption didn't take off because our economy is still so dependent on external demand or exports.

"What they should have done is made much more transformation into the domestic side, which would have induced much more spending and most importantly created more jobs in the Japanese workplace."

Japan has relied on exports for growth, but the problem is that the yen has been rising, making Japan less competitive abroad, the BBC's Roland Buerk says.

Analysis

Chris Hogg BBC News, Beijing

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The state-run People's Daily newspaper recently urged the US to "recognise and accept" China's inevitable rise onto the world stage.

We expect confirmation that China will overtake Japan as the world's second biggest economy in about six months. Some economists suggest China could pass the US to become the world's largest within 10 to 15 years.

But anyone who travels to the west or to the centre of this country will tell you that such comparisons, while important, offer an incomplete picture of life here.

Income per head here at $6,675 a year is still far lower than Japan's ($32,443) or the US's ($46,436).

In the poorer parts of the country there is evidence of growing investment and infrastructure spending that is making a real difference.

But in many parts of rural China, people live in basic conditions that would be unacceptable in Japan or the US.

Its achievements in pulling hundreds of millions out of poverty should be lauded. But the amount of work still to be done should not be underestimated.

The yen hit a 15-year high against the US dollar last week - adding to worries about the impact on exporters.

After the GDP figures were released, the yen was relatively unchanged against both the dollar and the euro. The dollar fell 0.4% to 85.81 yen while the euro dipped 0.1% to 109.81 yen.

Economics Minister Satoshi Arai said that the government needed to work with the Bank of Japan to respond to the rising yen.

'Risk of collapse'

Analysts say Japan may have to take action to lower the yen's value against other major currencies.

"The yen's rise may begin to hurt export growth in the latter half of the current fiscal year," said Norinchukin Research Institute economist Takeshi Minami.

"I think the Bank of Japan and the government need to take decisive action against currency moves."

Weakening exports are not the only problem confronting Japan.

Prime Minister Naoto Kan recently said Japan was "at risk of collapse" under its huge debts.

And the domestic market is slow, with the price of goods falling.

The country's central bank has already announced a scheme to offer 3 trillion yen ($35bn; £22bn) in low-interest loans in an effort to spur economic growth.