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Tokyo - The pace of Japan's economic growth will halve in fiscal 2011 from this year as a stimulus-driven shopping rush eases and exports fall on a strong yen and softer demand, the government said on Wednesday.
In its outlook report, the Cabinet Office also said consumer prices will stop falling but will not rise, dealing a blow to Prime Minister Naoto Kan's stated goal of ending deflation in the year.
Recent year-on-year falls in the consumer price index will halt in the middle of next year, the Cabinet Office said, but suggested this would not represent the defeat of chronic deflation in the economy.
Growth is forecast to slow to a real 1.5% from 3.1% in this year, the government said in its outlook report.
Government stimulus measures helped boost domestic production and consumption in the current year, including subsidy programmes for purchases of environmentally friendly vehicles and appliances.
Japan's economy grew 4.5% in the July-September quarter, amplified by a rush by car buyers to use expiring subsidies and smokers who stocked up on cigarettes ahead of a tax hike during the period.
The hottest summer on record also drove sales of items such as air conditioners, helping spur growth in the quarter. Private consumption accounts for around 60% of gross domestic product.
However, analysts warn of a contraction in the fourth calendar quarter as the removal of such one-off factors highlights Japan's exposure to a weakening export picture and slow domestic demand.
Recent data has shown a slump in industrial output, especially among carmakers, as well as weakening consumer confidence as such incentive programmes come to an end.
Locked in a trend
The economy remains mired in crippling deflation, as falling prices prompt consumers to hold off on purchase decisions in the expectation of further price drops, clouding future corporate investment.
Japan's export growth accelerated for the first time in nine months in November, data showed Wednesday, but the reading of a 9.1% increase fell short of expectations amid fears of a looming economic slowdown.
"The pick-up in the year-on-year growth rate of exports in November may look encouraging but exports are heading for a big quarterly fall," noted research consultancy Capital Economics.
Analysts said the Japanese economy remains locked in a trend of shrinking exports due to a stronger yen, which makes Japanese products more expensive in overseas markets, and expectations that overseas demand will weaken.
On Tuesday the Bank of Japan held its key rate at between zero and 0.1% after a two-day meeting, warning that a fragile recovery from deep recession was "pausing".
The central bank in October forecast that the country's economy would expand 2.1% in the fiscal year ending in April, and 1.8% in 2011.
Japan last month passed an extra budget worth $58bn to cover a new stimulus package aimed at averting the threat of a "double-dip" recession.
Kan's second stimulus package since he came to power is designed to ease concerns over deflation and a strong yen, and includes job programmes, welfare spending and assistance for small businesses.
Kan took office in June promising to slash spending and work towards cutting the country's massive public debt, at nearly 200% of gross domestic product.
But the state of Japan's economy has complicated his ambitions.
Consumer spending growth is expected to slow next year to 0.6% from 1.5% this year.
However, the government forecast unemployment to continue to slowly improve, with the jobless rate expected to fall in the fiscal year starting April to 4.7% from 5% currently.
