According to data released by the government Monday, Japan's economy grew at 0.3 percent in the second quarter down from 1.2 percent in the first three months of the year. The data also showed that the economy grew at an annualized rate of 1.4 percent in April-June down from 5.5 percent in the previous quarter.
The continuing debt crisis in Europe and the tentative U.S. recovery have hurt the demand for exports. The eco-car subsidy helped drive consumer spending, and public investment increased as earthquake-related reconstruction work got underway. The dependence on government support is worrying as a rise in tensions in the euro zone has hurt consumer and business confidence and is likely to weigh on private sector spending as the government support weakens.
The strengthening of the yen, especially due to global factors, is also worrying the Japanese economy. A weaker yen would help the Japanese exporters. But the Japanese government is finding it difficult to deliver a weaker yen since the investors are seeking to escape the euro zone crisis.
The Bank of Japan Thursday kept its key policy rate unchanged and refrained from announcing any monetary easing measures. Investors are expecting that the bank would need to expand its asset purchase program, or APP, with Japan's economy having lost its growth momentum faced with deflation and strengthening of the yen.
Market players sense that BOJ does not want to ease policy unilaterally on euro zone concerns. At the same time, it is expected to remain alert to respond in a coordinated manner with other central banks. With Spain's banking woes and Italy's increasing borrowing costs, the debt crisis in Europe has revived, severely affecting Japan's market sentiments as a consequence.
Apart from the boost in reconstruction spending, which largely reflects the replacement of lost assets, Japanese economic fundamentals are relatively weak. Moreover, business sentiment is lackluster, and firms are downbeat about the prospects for an improvement before the end of the year.