Japan coming out of its slump but Nikkei dives

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Official figures released in Tokyo showed the Japanese economy, the second largest behind the US, grew 0.9% between April and June after four consecutive quarters of decline.

Output was up 3.7% on the second quarter of last year, although this was less than analysts had hoped, and the Nikkei 225 Average fell 328.72 points to 10,268.61, having reached a 10-month high on Friday.

"Investors expected a rise in GDP during the quarter," said Naohiko Miyata, chief technical analyst at Mitsubishi UFJ Securities. "In that sense, there were no surprises, and investors were not impressed by the figure." France and Germany last week became the first European economies to pull out of recession, putting them ahead of the UK and the US, while Hong Kong has also returned to growth.

Output fell by 0.8% in the UK in the second quarter compared with a 0.3% rise in France and Germany. The Japan turnaround was fuelled by exports as global demand for Japanese cars and electronic items slowly recovers.

But economists and politicians sounded cautious, noting that domestic consumer spending remained fragile amid plunging incomes and rising unemployment. Takahide Kiuchi, chief economist at Nomura Securities in Tokyo, said: "We're over the worst but Japan is in no condition to achieve a sustainable recovery."