Japan's economy grew a revised 0.6 percent in the three months to June, less than preliminary figures had shown but confirming that the economy crawled out of recession after a full year of sharp contraction.
The unexpected downward revision from a preliminary 0.9 percent rise was mostly due to falls in inventories, which analysts took as a positive sign that companies have been clearing their stock out faster than expected.
With the global economy on the mend, exports are likely to underpin a recovery in Japan in the near future, but analysts are not convinced that will last beyond early next year, when a boost from government stimulus spending is likely to fade.
That could keep the Bank of Japan from raising interest rates from near zero and from scrapping its unconventional corporate funding support measures for a while to come.
The revised data shows that the economy's rebound was too modest in comparison to its deep slump in preceding quarters. But it does not change the near-term picture because a bigger negative contribution from inventory is not necessarily a minus factor -- it indicates progress in inventory adjustments, said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute.
The economy is likely to recover through the end of 2009 and slow down the following year. Given that such problems as deflation and a wide output gap are unlikely to be solved in the near term, the Bank of Japan will be pressed to keep its easy monetary policy.
Economists polled by Reuters had expected revised data to confirm the preliminary 0.9 percent reading for economic growth.
For a graphic of Japanese, U.S. and European GDP click on http://r.reuters.com/qym95d
The revised figure translated into annualized growth of 2.3 percent, against an initial reading of a 3.7 percent expansion.
Capital spending, traditionally an important driver for growth, was revised down to show a fall of 4.8 percent compared with the preliminary estimate of 4.3 percent.
The data showed capital spending remains weak. That doesn't mean we need to change the view that the fall in capex is moderating, but it suggests recovery will probably be slow, said Maiko Noguchi, senior market economist at Daiwa Securities SMBC.
TENTATIVE GLOBAL RECOVERY
Japan joined Germany and France in pulling out of recession first among the G7 countries in the second quarter, though the euro zone economy as a whole shrank 0.1 percent in the period and the United States contracted 0.3 percent or an annualized 1.0 percent.
But Japan remains a laggard in Asia, where neighboring South Korea's economy grew 2.6 percent in April-June while China's economy expanded 7.9 percent and India's grew 6.1 percent. A slew of data on Friday showed China's economic recovery is continuing this quarter as well.
A Reuters poll showed most advanced economies are expected to return to growth in the third quarter, auguring well for Japanese exporters, a key driver of the economy.
The median forecast of economists polled by Reuters is for Japan's economy to grow 1.1 percent in 2010 after a 2.8 percent contraction this year.
Japanese consumer confidence also rose for eight straight months to highest level in nearly two years.
Still, some economists are worried that a recovery in the global economy may be weaker than many hope given that consumers in the United States and some European countries are burdened by debt and banks are still far from healthy.
Domestic private consumption, which makes up more than half of Japan's GDP, is also likely to remain weak given the record high jobless rate and falling wages.
The incoming ruling Democratic Party of Japan has vowed to stimulate consumption by putting more money in the hands of households by offering child benefit, abolishing highway tolls and other steps.
Economists say such policies are likely to lift consumption in the near term. But many analysts also say it is not clear how they can finance all of these ambitious spending plans without relying on more debt issuance.
Japan's economy bounced back in April-June after contracting for four straight quarters, the longest such spell on record, as exports of cars and machines plunged in the wake of the global economic crisis after the collapse of Lehman Brothers last September.
(Additional reporting by Tetsushi Kajimoto and Rie Ishiguro; Editing by Hugh Lawson)