The data reaffirmed China's trajectory in surpassing Japan as the world's second-biggest economy amid increasing trade and diplomatic tensions between Asia's most powerful nations.

Japan's gross domestic product grew by an annualised 1.5 percent in the April-June quarter, well above an initial official estimate of 0.4 percent, as companies ramped up capital spending.

But Friday's data still represents a slowdown from the previous quarter's revised annualised growth of 5.0 percent, and Japan's weak export-led recovery remains hobbled by deflation and a strong yen.

"The latest data erased the impression that the Japanese economy was slamming the brakes, but still confirmed it was slowing," said Hiroshi Watanabe, economist at Daiwa Institute of Research.

"The economy will be in the doldrums for the rest of the year before picking up next year," he said, arguing the US and European economies were likely to expand on low interest rates and their relatively weaker currencies.

Japan remained behind its rival China in the second quarter, when its GDP stood at 1.2948 trillion dollars, below that of China at 1.3369 trillion dollars, the cabinet ministry said Friday.

Tensions between the two nations have risen recently, with Japan calling into question a surge in Beijing's purchases of Japanese government bonds amid debate as to whether China's actions are pushing the yen higher.

The sides have also clashed after Japanese authorities arrested the captain of a Chinese fishing boat in disputed waters of the East China Sea.

Japan's post-war "economic miracle" put it at number two behind the United States for more than 40 years, but stagnation after its property bubble burst in the 1990s has helped put China on course to supplant it this year.

Japan remains more than 10 times richer on a per-capita basis, according to the International Monetary Fund.

But the yen's appreciation has put many Japanese exporters at a disadvantage against foreign rivals as it erodes their repatriated earnings.

A recent government survey suggested that many companies in Japan were considering moving production overseas if the yen stayed high, casting a shadow over the nation's recovery.

The strong yen also makes imports cheaper, prolonging a cycle of deflation that has hurt Japan for years as consumers defer purchases in the hope of further price falls.

"We need to continuously watch a strong yen and slowing foreign economies as downward factors," a cabinet office official said Friday.

After weeks of trying in vain to talk the yen lower through verbal warnings, the government's tone has hardened ahead of a ruling-party leadership election next week that could see the prime minister's job change hands yet again.

Prime Minister Naoto Kan is under challenge from veteran powerbroker Ichiro Ozawa in the September 14 vote. Ozawa has been outspoken in demanding action on the yen.

The government on Friday unveiled details of an 11-billion-dollar stimulus package, and the Bank of Japan has expanded a multi-billion-dollar loan scheme to spur growth and offset the impact of a strong yen.

Officials meanwhile downplayed the looming bankruptcy of the private Incubator Bank of Japan, which has been ordered to halt operations, in what would be the country's first bank failure in seven years.

Satoshi Arai, state minister for fiscal and economic policy, said the small bank's failure did not threaten financial stability and would have "no big impact" on the economy.

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