Japan said yesterday its economy grew less than previously thought in the second quarter as the woes of the corporate sector took some steam out of its recovery from the worst recession in decades.
On a brighter note, consumer confidence rose for an eighth straight month, in August, hitting the highest level in almost two years, the government said.
The world's second-largest economy grew 0.6 per cent in April-June from the previous quarter, worse than an initial estimate of 0.9 per cent, the government said. Annualised growth was revised down to 2.3 per cent from 3.7 per cent.
But it was still the first expansion in five quarters - ending a year-long recession - and analysts said the downgrade was largely due to cuts by companies to their stockpiles of unsold goods, which bode well for the future.
"Since companies made progress in reducing stockpiles, it increased the prospect of positive growth for the July-September quarter," said Takuji Aida, an economist at the investment bank UBS.
He expects the economy to post annualised growth of about three per cent in the third quarter as the economy claws out of a brutal slump.
Outgoing Economic and Fiscal Policy Minister Yoshimasa Hayashi said the decline in stockpiles was a positive development.
"From a broad prospective, it is a positive development that progress is being made in inventory adjustments," Mr Hayashi told reporters.
Disappointment was also tempered by news that the government's consumer confidence index rose 0.7 points in August from the previous month, to 40.1 - the highest since October 2007.
Japan's heavy dependence on foreign demand to drive its economy left it highly vulnerable to the global economic slowdown, which crushed demand for its key exports such as cars, high-tech goods and machinery.
Its economy started shrinking in the second quarter of 2008 and suffered annualised contractions of more than 12 per cent for two consecutive quarters up to March.
Hideyuki Araki, an economist at Resona Research Institute, said companies were still struggling with excess capacity.
"Production is recovering on the back of improving exports but the future still looks uncertain," with deflation squeezing corporate profits, he said.
Firms' investment in factories and equipment is unlikely to show a strong upturn anytime soon unless overall demand recovers, he said.
Corporate inventory cuts reduced second-quarter growth by 0.8 percentage points, while lower capital spending lopped off 0.7 points, the data showed.
Private-sector capital investment shrank a revised 4.8 per cent from the previous quarter, worse than previously thought.
Credit Suisse economists said the latest data suggested inventory levels would stay flat or even rise slightly.
"This is rather considered positive for the economy," they said in a report.
Many Japanese companies are struggling to recover from massive losses due to the global economic downturn. Business leaders are also cautious about the policies of the incoming government, led by the Democratic Party of Japan which is to be launched next week.