Japan’s steadily reviving economy remains in its longest phase of consecutive growth since the Second World War but spluttered dangerously close to “stall speed” in the first quarter of fiscal 2007.

Japanese are dining out less, spending less on jewellery and other luxury items and the country's export products are performing less well in the critical US market.

Industrial spending — particularly by sectors exposed to Japan’s big automakers — was in far better health.

The modest expansion of Japan’s gross domestic product was well below consensus expectations and, economists at SG Securities said, leaves the Bank of Japan with “no possible justification” for a rise in interest rates at its monetary policy meeting on August 23.

Others believe that the central bank remains on track to raise rates by 25 basis points — from the present level of 0.5 per cent — between now and October.

Hiroshi Shiraishi, an economist at Lehman Brothers, said that the GDP numbers released today should not have a material impact on the Bank of Japan's near-term rate decision.

The Bank's decision, he said, “continues to depend on whether the global financial market finds its feet soon”.

But Asian central banks find themselves increasingly watchful of Chinese inflation, which leapt to 5.6 per cent in July from 4.4 per cent in June and has sent several key economic indicators into what Zhang Tao, the head of international economics at the People’s Bank of China, today called a "dangerous zone".

Many economists believe that China will lean towards more monetary tightening, although the drivers for its most recent rise in inflation were extremely narrow: eggs and pork.

As Glenn Maguire, the chief economist of SG Securities, put it in a note to investors: “As monetary policy should not be used to respond to short-term supply shocks in the supply of swine or eggs, the deterioration in inflation to a decade high does not warrant a monetary policy response."

Last week the Bank of Korea stunned markets with a surprise rate rise, with the move following a recent spree of monetary tightening measures in Australia, New Zealand and China itself.

The 0.5 per cent annualised growth that Japan achieved during the April to June period was the tenth successive quarter of economic expansion, but provided analysts with some worrying signals that growth in the world’s second-largest economy may be becoming too narrow.

“Both external and domestic demand apparently lost steam in the reporting quarter,” a Cabinet Office official said.

Analysts worry that Japan’s export growth may become too heavily reliant on continuing demand from China.

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