Japan's economy grew an anemic 0.1 percent in the April-June quarter, reinforcing expectations that a shake-out in global markets will prompt the central bank to rethink a rate hike this month.

The growth in gross domestic product, the broadest measure of the economy, fell short of an already modest consensus forecast for a 0.2 percent increase, partly thanks to weak exports, although analysts said that in itself would not prompt the Bank of Japan (BOJ) to hold fire.

If the GDP figure alone is considered, the BOJ would raise rates on solid fundamentals, said Mamoru Yamazaki, chief economist at RBS Securities.

But given subprime problems and their impact on the market, the rate hike this month has become more unlikely.

Swap contracts based on the BOJ's key policy rate priced in on Monday a 30-35 percent chance of a rate rise this month, compared with around 75 percent just last Thursday.

Economics Minister Hiroko Ota said it was up to the BOJ to make specific rate decisions, although she added that the market fall-out needed close monitoring.

At the moment, the impact on the real economy has not been substantial and is limited to the financial system, Ota said in a news conference after the growth figures were issued.

But I would like to carefully watch if it will affect the real economy such as hurting consumer sentiment, she said.

Financial markets showed limited response as the data produced few surprises and eyes were on the other issues.

The quarterly growth translated into an annualized rise of 0.5 percent, below economists' forecast of a 0.9 percent expansion and much slower than a revised 3.2 percent increase in the previous quarter.

EXPORT GROWTH EASES

Exports lost momentum in the quarter, partly because of slower U.S. growth, and made no contribution to growth, yet overall GDP growth still marked the 10th straight quarter of expansion and economists said mild expansion in the Japanese economy was continuing.

Tame income growth also kept consumers' purse strings tight. Private consumption rose for the third straight quarter but, at 0.4 percent, it was half that seen in January-March.

Growth in corporate capital spending, however, a key driving force of the economy, rebounded to 1.2 percent from 0.3 percent in the previous quarter, pointing to solid expansion ahead.

The overall growth is weak on the surface, but it is largely a reaction from the sharp growth in January-March, said Naoki Iizuka, senior economist at Mizuho Securities.

Consumption and capital expenditure were relatively firm, which show Japan's economy remains on track for steady growth led by domestic demand.

With the economy in good shape, many analysts had expected the BOJ to bump up its key policy rate at its Aug 22-23 meeting to 0.75 percent -- the highest level since 1995 -- from 0.50 percent.

But traders scaled back expectations of an August move, as speculation grew that concerns over the credit squeeze and resulting market volatility could persuade the BOJ to hold fire.

The BOJ scrapped its zero interest rate policy and raised the key overnight call rate target to 0.25 percent in July last year. It nudged up rates again to 0.5 percent in February and has kept monetary policy on hold since then.

Japan's economy has been expanding since early 2002 and is enjoying its longest period of growth in the postwar era, albeit at a slower pace than in previous booms.

The government made a minor revision to the way it compiles preliminary gross domestic product from the April-June data, which included a change in the calculation method for inventory contributions to GDP.

The change pushed down quarterly GDP growth by 0.1 percentage point.

Japan