TOKYO - Japan's economic growth will moderate from stimulus-driven strength seen earlier this year, analysts polled by Reuters said, retaining a cautious view on an outlook clouded by the strong yen and Europe's debt woes.
Deflation will likely persist at least until the end of 2011, prompting the Bank of Japan to maintain interest rates near zero, the Reuters poll of over 50 economists showed.
"The economic recovery will likely be moderate," a senior economist at at Japan Research Institute, Hideki Matsumura said.
"I'm more worried about domestic demand than overseas factors. Japan remains in deflation, while weak figures have been seen in data such as machinery orders and the number of jobs."
Japan's economy will grow 0.4 per cent in both the third and fourth quarters of this year, the poll showed. That is roughly unchanged from the previous month's forecast, which was for a 0.3 per cent expansion in the third quarter and a 0.4 per cent increase in October-December.
Japan's economy grew an annualised 5.0 per cent in the first quarter as factory output benefited from solid exports to Asia and government incentives for purchases of low-emission cars and electronics.
But analysts had expected growth to slow as the effect of government stimulus fades, and worries remain about the potential negative impact from Europe's debt problems and the yen's strength.
Adding to such concerns, Japan faces political gridlock after the ruling party's poor showing in an election on Sunday, which could thwart efforts to curb a huge public debt and get the economy in shape.
The Bank of Japan is expected to keep its policy rate on hold in a review that ends on Thursday. It is also set to revise up its economic forecast for the current fiscal year to next March, but stick to its cautious view on the outlook.
Japanese core consumer prices are expected to fall 1.0 per cent in the third quarter, compared with a 1.3 per cent decline in the second quarter. That consensus is unchanged from June's survey. Medians showed a 0.7 per cent drop in the fourth quarter.
Weak domestic demand has kept Japan in grinding deflation, which hurts the economy as companies and households put off spending on expectations that prices will fall more.
Core consumer prices, which include oil products but exclude volatile prices of fresh food, fell 1.2 per cent in the year to May, the 15th straight month of annual declines.
"The supply and demand gap is hard to resolve and deflation is expected to continue for a while," said Satoru Ogasawara, an economist at Credit Suisse.
The BOJ is expected to leave its policy rate unchanged at 0.1 per cent at least until the end of 2011, the poll showed.
