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Weak Japan GDP stirs speculation on yet more easing

Disappointing growth figures released in Japan on Tuesday rekindled speculation that the central bank might have to unleash yet more stimulus to prop up a faltering recovery that is refusing to take root.

[TOKYO] Disappointing growth figures released in Japan on Tuesday rekindled speculation that the central bank might have to unleash yet more stimulus to prop up a faltering recovery that is refusing to take root.

The numbers came as data from China showed its international trade was slowing, underlining the difficulties the world is facing as Beijing re-orientates its export-driven economy.

Tokyo's revised GDP figures on Tuesday showed the world's number three economy shrank a little less than previously thought - 0.3 per cent, against an earlier estimate of 0.4 per cent.

But analysts said the slightly-better-than-expected headline concealed worrying details that showed domestic demand was not in great shape.

Marcel Thieliant of Capital Economics said manufacturers were running up inventory - indicating they were not selling their products - and were investing less in new machinery and plants.

"The details were hardly reassuring," he wrote in a commentary.

"The upward revision was mostly due to a larger contribution from stock building," he added.

The latest numbers present another challenge to Prime Minister Shinzo Abe, whose bid to kickstart Japan's long-laggard economy has stumbled.

However, Mr Abe - who swept to power in late 2012 - was on Tuesday re-elected unopposed as head of his ruling Liberal Democratic Party in a rubber stamp poll that could give him three more years at the helm.

He sought to put a positive gloss on the state of the economy, which he has vowed will return to growth and banish the years of deflation.

"Employment and incomes are both getting stronger. The remaining (task) is to keep this virtuous economic cycle going so people feel that a recovery in under way and that the exit from deflation will drive future economic growth," he said.

The slowdown comes more than two years after Mr Abe launched his policy blitz, dubbed "Abenomics", aimed at breathing life into the economy.

The programme called for big government spending, massive Bank of Japan (BoJ) monetary easing and reforms to cut red tape in Japan's highly regulated economy.

But reforms, including shaking up a protected agricultural sector and drawing more women into the workforce, have not moved as fast as initially expected.

Household spending has also been unsteady following a sales tax rise last year, brought in to pay down a massive national debt, which saw consumers rush to stores before prices rose.

"The economic outlook will likely depend on a recovery in domestic demand, such as capital investment and household spending," said SMBC Nikko Securities.

"If household consumption fails to recover, it will raise the possibility of an extraordinary budget" to deal with the downturn.

Beijing - one of Japan's biggest trading partners and a huge market for Japanese goods - said Tuesday that imports in August fell 13.8 per cent on year.

It was the 10th consecutive monthly fall in import values.

Exports, the powerhouse behind China's massive economic run-up of recent years, fell 5.5 per cent year-on-year, with shipments to Japan and the European Union taking a hit.

Thieliant predicted Japan's GDP would expand by 0.3 per cent in each of the next two quarters, "which would imply a below-consensus rise of 0.5 per cent in 2015".

BoJ chief Haruhiko Kuroda has pushed back a timeline for hitting 2.0 per cent inflation, a cornerstone of Abenomics, although he insists healthy price rises are around the corner.

But Mr Kuroda has said he would consider expanding the bank's record 80 trillion yen (US$640 billion) annual asset-buying scheme - a means to pump money into the economy similar to the US Federal Reserve's quantitative easing - if weak oil prices keep holding back near-zero inflation.

"We stick to our view that the Bank of Japan will step up the pace of easing at its end-October meeting," Mr Thieliant said.

The downturn follows stronger-than-expected growth in the first quarter owing to a temporary pickup in capital spending, with Japanese firms generally reporting upbeat profits.

In the January-March period, Japan's economy expanded 1.1 per cent.