Part of Japan's recovery has been a statistical illusion, according to the government, which on Thursday announced a change to gross domestic product calculations that indicated the economy had not grown for the past six months.

Japan has been widely praised by investors and economists for a recovery seen as the strongest since the bursting of the bubble in the 1990s. But the revised GDP numbers indicate the upturn was never as strong as originally thought.

The cabinet office, for the first time issuing historical GDP data calculated in line with international standards, said the economy stagnated in April-June and shrank in July-September.

Figures derived using the old method were themselves branded as deeply disappointing when released and showed expansion of 0.3 per cent and 0.1 per cent in the two quarters.

The new GDP calculations came as the Bank of Japan on Thursday downgraded its economic assessment following a similar move by the cabinet office earlier in the week.

“Japan's economy continues to recover as a whole, although the increase in exports and production seems to be coming to a pause,” the BoJ said in its monthly report, for the first time highlighting the weakness of external demand.

The cabinet office said that from next month it would adopt the new GDP methodology, which is already used in the US and UK. The current system is criticised for distorting real growth by exaggerating deflation.

When applied to the economy in the past, the change takes much of the dazzle off the country's performance on either side of the new year, when growth appeared to hit a 13-year high and surpass that in the US.

Expansion in the fiscal year to March 2004 had been estimated at 3.2 per cent, but under the new methodology was only 2 per cent. Thursday's figures were only provisional estimates and could be subject to large revisions.

The economy's impressive growth ignited hope that Japan was about to put behind it more than a decade of repeated recessions. Foreign investors were attracted to Tokyo equities in droves, pushing the Nikkei 225 stock average up 47 per cent in the past fiscal year.

Even if Japan's cyclical upswing was less dramatic than thought, bullish economists are likely to point out that structural reforms have made the economy more resilient than it was a few years ago.

Companies, particularly big manufacturers, have trimmed much of the excess capital, debt and labour that weighed them down durning the 1990s, and are now exercising strict cost control. The country's banking crisis has also eased as the large banks have disposed of non-performing loans and turned their attention to raising profits.

Deflation persists, however, and restructuring among small companies in sectors such as construction and retail has far to go.

Even before Thursday's cabinet office announcement, economists agreed that Japan's economy had come close to stalling during the summer, when exports slumped, and was only just beginning to revive.

As well as downgrading its economic assessment yesterday, the central bank, also deleted a comment from its October appraisal that the upturn would “gather strong momentum”.

Although there are signs that demand from the US and China is reviving, a rise in the value of the yen is threatening exports by pushing up the value of Japanese goods overseas.

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