WASHINGTON - Japan's economy contracted in the second half of 2012 and is on track for lackluster growth of 0.8 percent this year, hurt in part by its bitter territorial row with China, the World Bank said in a report on Tuesday.

Relations between China and Japan, the world's biggest economies after the United States, have deteriorated sharply since September after the Japanese government illegally "purchased" part of the Diaoyu Islands in the East China Sea.

The value of Japanese exports to China fell by 17 percent between June and November of last year, contributing to a 3.5 percent annualized drop in Japan's growth in the third quarter.

The World Bank said the end of government tax incentives to purchase fuel-efficient automobiles also hurt the economy, as well as the fading boost to growth from reconstruction spending in the aftermath of the 2011 earthquake and nuclear disaster.

"In Japan, the economy appears to be contracting -- in part because of political tension with China over the sovereignty of islands in the region," the World Bank said in its twice-yearly Global Economic Prospects report.

Revised GDP figures released by Japan in December showed the Japanese economy contracted in both the second and third quarters, and analysts expect it shrank further in the final three months of the year, as does the World Bank.

The Washington-based global development lender said the weakness in Japan could pinch global trade, as Japan is the world's fourth-largest importer.

In contrast, a resolution of the Sino-Japanese tensions could help speed return to growth in Japan and boost the global economic recovery, the Bank said.

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