Japan growth slows as eurozone crisis weighs

Growth in Japan's export-driven economy slowed in the three months to June, official data showed on Monday, with the debt crisis in Europe crimping demand in the key market.

Gross domestic product grew a worse-than-expected 0.3 percent in the second quarter from the previous three months, the Cabinet Office said, a fourth straight rise but much slower than the brisk 1.3 percent seen in January-March.

The data came in significantly lower than market expectations for a 0.7 percent increase, as exports slowed and despite a ramp-up in government spending since the March 11 quake-tsunami disaster last year.

Adding to the headwinds being faced by the world's number three economy is the strong yen, which has made the country's exports less competitive in overseas markets.

However, Japanese economic and fiscal policy minister Motohisa Furukawa highlighted the growth of private demand to stress his view for continued moderate growth.

"The economy of our country is trending upward, driven by domestic demand," he said in a statement.

"With the employment and earnings environment expected to improve further... the economy is expected to maintain moderate growth for the July-September period and later," he said.

"However, we need to pay careful attention to downward risks for the global economy amid the European fiscal debt crisis."

While officials stressed the bright side of the data, private economists sounded concerns as the Chinese economy, which is a key driver of regional growth, suffers a deceleration while stimulus programmes at home begin to expire.

"In general, we can't see any strength in the Japanese economy, which was mainly sustained by government fiscal measures," said Hideki Matsumura, senior economist at Japan Research Institute.

The government has taken a series of steps to spur growth, including offering incentives for fuel-efficient vehicle purchases and measures to rebuild the northern region hit by the deadly earthquake and tsunami.

"If the economy can maintain the current strength, it is likely to mark another growth in the July-September quarter," Matsumura said.

Economy minister Furukawa also admitted that the policy impacts of the auto purchase incentives and reconstruction investments did not add to the nation's overall growth during the quarter.

Among factors for future concerns is the auto purchase programme ending likely by early September, Matsumura said.

"The slowing Chinese economy is another concern. The Japanese economy may suffer a contraction in the October-December quarter," he said.

-- Dow Jones Newswires contributed to this report --