JAPAN’S ECONOMY grew at an annualised 1.4 per cent in the second quarter against analysts’ expectations of a 2.3 per cent rise, as weak exports and softer consumer spending offset strong public investment in the tsunami-stricken region of Tohoku.

The data represented a sharp drop from the first quarter, in which growth was an annualised 5.5 per cent as Japanese consumers shook off their post-tsunami restraint.

Analysts said the world’s third-largest economy had struggled to adjust to a strengthening yen and faltering growth in key export partners such as China and the EU. During the quarter the yen gained 4 per cent against the US dollar. A surplus of imports over exports trimmed 0.1 percentage points from overall output.

“The outlook for external demand is definitely deteriorating,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo, noting “nearly all trade and manufacturing activity data for July are downbeat in [Japan’s] Asian neighbours”.

Motohisa Furukawa, economy minister, warned that the government “needs to be alert to further deterioration in overseas economies”.

As expected, the strongest line in yesterday’s preliminary gross domestic product figures came from public investment, which rose 1.7 per cent from the first quarter. Spending was led by clean-up and decontamination in Fukushima, Miyagi and Iwate, the three prefectures hit hardest by the earthquake and tsunami last year. Analysts said this suggested that growth may fall further in the second half of this year.

An official from the disaster restoration development division in Miyagi’s prefectural government said that he was concerned about an economic downturn “after the end of reconstruction works”.

Japan’s dependence on state spending to fuel growth is also worrying in the context of its growing debt burden, analysts said.

– (Copyright: 2012 The Financial Times Limited)