Japan's economic growth slowed markedly in April-June and analysts predict further slowdown, adding to policymakers' difficulties as they grapple with deflation and a rise in the yen that threatens an export-reliant recovery.
Slowing growth in Japan's key export destinations such as the United States and China clouds the outlook, while policymakers step up efforts to talk down the yen after it surged to a 15-year high against the dollar this month of 84.72 per dollar.
Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa are likely to meet later this week to discuss the yen's strength and possible responses, although analysts say likely options would be limited.
I think the Bank of Japan and the government need to take decisive action against currency moves. Solo currency intervention is possible if the yen approaches 80 to the dollar. If that is accompanied by monetary easing by the Bank of Japan, it may have a certain effect, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
The quarterly expansion of 0.1 percent in gross domestic product (GDP) translates into an annualized growth of 0.4 percent, well below the median market forecast of 2.3 percent annualized growth and much less than the 2.4 percent annualized growth in the United States in the same quarter.
That followed a revised 4.4 percent annualized growth in the first quarter, as export growth moderated and a stimulus-driven recovery in consumption ran out of steam.
It was the third straight quarter of expansion.
Consumption was flat, showing government payouts to households with children didn't give much of a boost to private spending, Minami said, adding that the yen's rise may begin to hurt export growth in the latter half of the current fiscal year.
Japan's economy has been spotty since emerging from its worst recession since World War Two in the second quarter of 2009 on the back of exports, particularly to Asia, and government stimulus for spending on energy-efficient cars and electronics.
(Additional reporting by Kaori Kaneko and Yoko Nishikawa; editing by Charlotte Cooper)