Reuters | Sep 07, 2017 10:10PM ET

By Leika Kihara

TOKYO (Reuters) - Japan's economic growth in the second quarter was much slower than seen in a stellar preliminary reading, government data showed on Friday, confounding hopes for a long awaited pick-up in domestic demand.

The downgrade was widely expected after data used to revise gross domestic product (GDP) figures showed capital spending growth in April-June slowed from the previous quarter.

While the disappointing data may weaken confidence in the government's economic policies and the business outlook, analysts still expect the economy to sustain a steady recovery as robust global demand underpins exports and a tightening job market improves the prospects for higher wages.

"It's indeed a big revision, but growth in the economy and capital expenditure is still pretty fast," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"There's no need to be pessimistic about Japan's economy. Given strong corporate profits and improving business sentiment, capital expenditure will remain firm."

Japan's economy expanded at an annualized rate of 2.5 percent in April-June, much less than an initial estimate of 4.0 percent growth, Cabinet Office data showed.

While it was lower than a median market forecast for a revision to 2.9 percent growth, the economy still managed to post a sixth straight quarter of expansion.

Japan's GDP data tends to experience big revisions due to the way the Cabinet Office estimates capital expenditure, consumption and inventory in the preliminary reading.

The downgrade in annualized GDP growth, which was the biggest since comparable data became available in 2010, was largely due to a sharp markdown in corporate capital spending.

The quarter-on-quarter pace of rise in capital expenditure was revised down to 0.5 percent from an initial reading of 2.4 percent, reflecting data that became available after the release of preliminary GDP.

Private consumption, which makes up 60 percent of GDP growth, rose 0.8 percent, roughly unchanged from the preliminary 0.9 percent increase, the data showed.

The data follows a recent run of indicators that suggests economic growth should continue in the current quarter thanks to solid exports and factory output.

"July data on industrial production and consumer spending point to a slowdown in the third quarter. But the bigger picture is that the economy is on track for the seventh consecutive quarter of expansion," said Marcel Thieliant, senior Japan economist at Capital Economics.

Wage growth and household spending, however, remain lackluster despite a tight job market, keeping the Bank of Japan under pressure to maintain its massive monetary stimulus even as its U.S. and European counterparts contemplate a gradual exit from their ultra-loose monetary policies.