"The momentum is definitely waning," said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo and a former central bank official.
"Exports are definitely weakening, and domestic demand is also softening."
From the previous quarter, GDP grew 0.3 per cent. Quarter-on-quarter figures show consumer spending rose 0.1 per cent in the April to June period, slower than a 1.2 per cent advance in the previous three months.
Net exports, or exports less imports, cut 0.1 percentage point from GDP.
Government incentives for households to purchase fuel-efficient cars have been supporting consumer spending, which accounts for more than half of the economy.
Mizuho Securities expects the program to expire this month, which may increase the nation's reliance on overseas demand for growth.
Prime Minister Yoshihiko Noda has also budgeted 19 trillion ($299 billion) for rebuilding from last year's earthquake and tsunami.
Pressure may rise on policy makers to consider a supplementary budget and monetary stimulus to shore up domestic demand as Noda pushed a sales-tax increase through the Diet last week.
Finance Minister Jun Azumi said last month the Government would assess the value of more spending after examining today's growth report.
"The Japanese economy can anticipate little support from overseas demand and the Government has no other choice but to mobilise fiscal spending," said Hiroshi Watanabe, a senior economist at SMBC Nikko Securities in Tokyo.
"Drafting a supplementary budget is already a done deal."
Sony cut its full-year profit forecast this month after gains in the yen eroded overseas earnings and sales of consumer electronics weakened.
Canon, the world's largest camera maker, also last month cut its full-year profit forecast because of a stronger yen and expectations for weaker growth in the US, Europe and China.
Sony and Canon get about 70 per cent and 80 per cent of sales revenue outside Japan, respectively.
"The downward risks to exports may grow in the third and fourth quarters relative to the BOJ's outlook, prompting the central bank to cut their growth forecast and apply more easing in October," Yoshimasa Maruyama, chief economist at Itochu in Tokyo, said before the report.
The Bank of Japan refrained from easing policy at a board meeting last week. Central banks around the world have been supporting their economies as Europe's woes deepen.
The Philippines unexpectedly cut interest rates a third time this year to a record low on July 26, and the US Federal Reserve said it will pump fresh stimulus if necessary.
The economy contracted 0.1 per cent from the previous quarter on a nominal basis, and the GDP deflator, a measure of price trends, shrank 1.1 per cent from the same quarter a year earlier, the report showed.
ATOMIC POWER OVERHAULED
Japan's atomic power industry has lost a record $57 billion since the Fukushima tsunami and meltdown in 2011, wiping out seven years of profit.
On top of that, the Government is preparing to force regional monopolies to spin off transmission assets from generation, under a July 13 announcement that helped cut 1.3 trillion ($20.4 billion) in market value at the nine utilities from Tohoku Electric Power to Kansai Electric Power.
The overhaul, designed to spur competition, is the industry's biggest in post-war Japan.
Breaking the electricity model that powers the world's second-biggest economy, tried with some success by Germany and Spain, risks shareholder value.
The utilities will lose guaranteed access to distribution grids as they struggle to replace idled nuclear reactors, a scenario threatening dividends that were 46 per cent above the average of Nikkei 225 Stock Average companies in the five years to 2010.
"The big assumption about the electricity business was the utilities were guaranteed to generate a certain level of dividends," Takashi Aoki, a Tokyo-based fund manager at Mizuho Asset Management said. "It was expected that the utilities would resume dividends once reactors are restarted, but that prospect has dimmed."
Chugoku Electric Power was the only nuclear plant operator that provided a dividend payout forecast for this fiscal year in its latest earnings.
Tokyo Electric, which lost reactors in meltdowns and was effectively nationalised, expects to pay no dividend and the others left their payout forecast "undecided".
- Bloomberg
