Japan's economy expanded just 0.3% in April-June, half the pace expected, fuelling concerns growth will continue to flag as a rebound in consumer spending starts to lose momentum and Europe's debt crisis weighs on global demand.
The data provides further evidence of a global slowdown raising expectations in financial markets that policymakers will take action to lift their economies. The United States, Japan and China have all reported weaker growth in the April-June quarter compared with their previous-quarter figures.
Japan's growth undershot expectations for a rise in gross domestic product of 0.6% and was sharply lower than an expansion in the previous quarter of 1.3%, a revision from 1.2% reported initially, the Cabinet Office said.
Financial markets showed a muted reaction to the data.
"As domestic demand is losing momentum and exports will likely weaken further due to Europe's debt trouble, there is a possibility that Japan will go back into an economic lull in July-September," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo.
The data highlights the Bank of Japan's growing concern that slowing exports will weigh on economic growth in the months ahead, which could set the stage for additional monetary easing in coming months.
"Europe's sovereign debt crisis remains a major risk to Japan and the global economy," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
"The Bank of Japan will likely take a wait-and-see stance but it could act again next month if financial turmoil and further monetary easing by the US Federal Reserve prompt a spike in the yen, threatening Japanese exporters' earnings and the economy's recovery prospects," Shikano said.
Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co in Tokyo, also said that the impact on growth of reconstruction work following last year's earthquake and tsunami is waning.
"There will still be public works spending for reconstruction from last year's earthquake, but the gains won't be as fast as they were in the first half of the year," Miyazaki said.
The world's third-largest economy grew at an annualised rate of 1.4%, less that the median forecast of 2.5% and slightly off the 1.5% annualised pace of the United States in the same quarter. The US economy had expanded at a 2.0% pace in the January-March quarter.
China's economy grew in the second quarter 7.6% from a year earlier, down from 8.1% in the first quarter.
"Japan's economy continues in an uptrend led by domestic demand," Economics Minister Motohisa Furukawa said in a statement issued after the data release.
Growth in private consumption, which makes up about 60% of the economy, slowed to just 0.1% after expanding 1.2% in the previous quarter. The reading was also below a median estimate of 0.3%.
External demand shaved 0.1% point off GDP in the second quarter, while domestic demand contributed 0.4 point, the data showed.
Japan's economy is expected to outperform most of its G7 peers this year helped by solid domestic demand, but analysts have slashed forecasts for factory output as the slowdown in the global economy becomes more pronounced.
A persistently strong yen is also a concern, because it can weigh on corporate earnings and lead some firms to delay capital expenditure.
Several exporters, including electronics giant Sony Corp and carmaker Nissan Motor Corp, said their April-June earnings took a hit from the strong yen.
Nissan said the yen cut 25.7 billion yen off its quarterly operating profit of 120.7 billion yen.
The currency has become a safe haven during the euro zone debt crisis, but members of the government and the central bank worry that the strong yen will hurt business and consumer sentiment.
The Bank of Japan left monetary policy unchanged last week but lowered its assessment of exports and factory output, a sign it is ready to ease policy further if Japan's recovery prospects are threatened.
