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Japan recovery stumbling

Tokyo - Japan's economy grew much less than first estimated in the third quarter, as cautious companies decided to save rather than spend, adding to evidence the recovery is stumbling.

Real gross domestic product expanded at an annualised pace of 1.3% in the July-September quarter the government said on Wednesday, much lower than its preliminary figure of 4.8% provided last month. The new figure corresponds to 0.3% growth from the previous quarter instead of the 1.2% first reported.

The big cut stems largely from capital investment - spending by companies on equipment, factories and other assets - which fell 2.8% from the previous quarter after the government incorporated additional data. The Cabinet Office had initially estimated that companies increased spending by 1.6%.

The tepid pace of third quarter growth adds to recent signs that Japan's economic recovery may be losing steam. The world's second biggest economy faces intensifying deflation on top of a still uncertain global outlook.

Compounding worries is the yen, which surged to a fresh 14-year high against the dollar late last month.

Japan is particularly vulnerable to currency swings because it relies so heavily on exports to drive the economy. A stronger yen reduces the value of overseas profits for exporters like Toyota and Sony and makes their products more expensive in foreign markets.

"When releasing the preliminary figures, I commented with hope that a path for domestic demand-led recovery may have emerged, but now we need to re-examine that," Keisuke Tsumura, parliamentary secretary of the Cabinet Office, told reporters, according to Kyodo News agency.

Such concerns led Prime Minister Yukio Hatoyama to unveil a fresh $81bn stimulus package on Tuesday to keep Japan from lurching back into recession and bolster his party's prospects ahead of upper house elections next year.

Despite shrinking tax revenue, the administration agreed to ¥7.2 trillion ($80.6bn) in new spending after days of negotiations with coalition partners. The package includes measures to bolster employment, extend consumer incentives to buy eco-friendly products and provide support for small and medium-size firms hurt by the strong yen.

Analysts doubted whether the new government spending would do much to bolster growth.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, expects Japan's economy to hit a mild "soft patch" in the second quarter of 2010. While strength in Asian exports will help fend off recession's return, persistent weakness within Japan will likely slow growth, he said.

"The fact that manufacturers are saddled with excessive capacity and employment that cannot be undone by a cyclical upturn means cost cutting will continue for some time," he said in a report on Wednesday. That will depress sales of consumer goods and household incomes.

In the government's latest report, capital investment declines overshadowed slightly better figures for consumer spending and exports.

Private consumption, which accounts for 60% of the economy, rose 0.9% in the third quarter, up from a preliminary estimate of 0.7%. Exports were up 6.5%, compared with 6.4% in last month's report.

GDP, or the total value of the nation's goods and services, rose at an annual pace of 2.7% in the April-June period after posting a record decline in the first quarter amid the country's worst recession since the Second World War.

But since then, consumer prices have continued to fall, just as they did during Japan's "Lost Decade" in the 1990s.

Lower prices may seem like a good thing, but it can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It may also increase debt burdens.

- AP

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