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Politics, debt weighing on Japan economy as in U.S.

(MoneyWatch) Japan's economy is slowing and efforts to change that are being hampered by problems all-too-familiar to the U.S.: A gridlocked legislature and rapidly swelling national debt. This poses one more challenge for America's already-fragile recovery.

Revised numbers show the Japanese economy grew at half the already anemic rate reported for the second quarter of the year. Gross domestic product grew an annualized 0.7 percent from April through June, the Cabinet Office said in Tokyo Monday. This is 50 percent less than an earlier calculation of 1.4 percent.

In the first three months of the year Japan's economy grew by 5.5 percent -- well ahead that of most industrialized nations. This was fueled by robust consumer and reconstruction spending driven by the nation's effort to rebuild after the devastating earthquake and tsunami in March 2011.

However from April to June that spending was no longer enough to counteract the slowdown in global demand caused by Europe's sovereign debt crisis and a slowdown in China's economy -- Japan's largest trading partner. The deteriorating external situation comes just as the government is winding down its funding for rebuilding efforts. All this has caused Japanese companies to cut capital spending, further inhibiting consumer purchasing.

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There have been no signs of improvement since then. Japanese exports in July posted the sharpest annual drop in six months. Last week the government announced that its composite index of leading economic indicators, a guide to conditions in coming months, fell to its lowest level since May 2011 - just after the disaster. Also last week the Organization for Economic Co-operation and Development said it expected an annualized fall in the Japanese economy of more than 2 percent in the current quarter.

Just as in the U.S., the battle over the deficit has hamstrung the government. Gridlock in parliament has prevented Japan from addressing its current spending needs, never mind taking action to address the slowdown. Tokyo has had to delay $63 billion of already-budgeted spending over the next three months because of a dispute over the timing of the next general election.

This delay means Japan, already saddled with the world's largest public debt burden, may run out of money as soon as December, according to the finance ministry. Opposition parties are using passage of funding bills as leverage in their effort to get Prime Minister Yoshihiko Noda to schedule an early election. Last month Noda, Japan's sixth prime minister in the past six years, pledged to go to the polls "in the near future" in return for the passage of a bill doubling Japan's 5 percent sales tax.

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