Washington - Slower demand from developed nations and increasing turmoil in regional markets has decreased growth and productivity in emerging Asian economies, the International Monetary Fund said Wednesday.

A major policy challenge for this extremely diverse region is how to respond to the global financial turbulence and weakening growth outlook, without losing sight of increasing inflation.

In China, decreasing exports meant that economic growth dipped to 10.5 per cent in the first half of this year, from 12 per cent in 2007, according to the IMF's World Economic Outlook.

As investments weakened in India, second quarter growth dropped to 8 per cent. Economies of the Association of Southeast Asian Nations (ASEAN) have also decelerated.

Growth in emerging Asian nations is projected to dip steadily from 7.75 per cent in 2008 to 7 per cent in 2009, as compared to 9.25 per cent in 2007. While high food and fuel prices will persist, government subsidies that are common in this region will cushion any blow to purchasing power.

In the coming months, while growth will moderate and food and fuel prices will eventually subside, high levels of inflation are expected - about 7.25 per cent in 2008 for the whole region, from 5 per cent in 2007, before declining to 6 per cent in 2009.

Countries have so far had varied responses to tackling inflation: Some, such as India, Taiwan, Indonesia, the Philippines and Thailand, hiked interest rates; Cambodia and Vietnam tightened reserve requirements; India and Korea supported their currencies by intervening in the foreign exchange market; in China, the People's Bank lowered the benchmark lending rates.

The IMF said Asia's advanced economies were also part of the global downturn. While Japan stood its ground in the first quarter of 2008, increasing commodity prices and weakening external demand eventually took their toll. By the second quarter, the economy had contracted at a 3 per cent rate.

The report foresees a continuing weakness in the year ahead, with the decline spurred by slower external demands from the United States and Western Europe. While spiralling food and fuel prices coupled with weakening wages have negatively impacted consumer confidence, the expectation of diminished profits has weighed heavily on corporate investment plans in Japan.

Growth in 2008-2009 is expected to be below 1 per cent, described in the outlook as "significantly below potential." The economy also faces a rapidly aging population and increasing public debt.

The collapse of US investment bank Lehman Brothers last month led to growing concerns about the exposure of Japanese banks to the failed institution, contributing to a fall in equity prices.

As the IMF outlook was released Wednesday, Japan's benchmark Nikkei 225 Stock Average nosedived to the lowest closing level since June 2003 in a five-day losing streak amid mounting concerns over the global recession.

The Nikkei plunged 952.58 points, or 9.38 per cent, to end at 9,203.32. Wednesday's losses in the Tokyo market were the third biggest one-day drop in post-war Japan.

The IMF said that Japan has experienced a much larger decline in its terms of trade in recent years than other developed economies, but its impact had been mitigated by healthy exports to developing nations.

Another factor that has softened the blow is Japan's efficiency in using oil, even though it depends on imported oil for almost all of its domestic needs.

Other advanced economies in the broader Asia region, such as New Zealand and Australia, are also slowing down considerably after a prolonged period of economic expansion that rode on housing and commodity booms, the IMF said.

GDP growth in Australia is expected to slide to 2.5 per cent in 2008-2009, from 4.25 per cent in 2007. (dpa)