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TOKYO – Japan's economy grew more robustly than expected in the first quarter of this year, at a 1.7 percent annual pace, but economists expect the expansion to slow in the current quarter.
Solid consumer demand and higher government spending helped offset relatively weak business investment in January-March. But data since then have been discouraging, and a major earthquake in southern Japan last month likely will drag on growth in this quarter, economists said. From the previous quarter, the economy inched up 0.4 percent.
"Japan's GDP figures are notoriously volatile, and with output flat compared to a year ago, there can be no doubt that the economy is not doing well," Marcel Thieliant of Capital Economics said in a commentary. In the fourth quarter, gross domestic product contracted 0.4 percent.
The recent weak data have raised expectations that Prime Minister Shinzo Abe may put off a planned sales tax increase due in April 2017 to prevent further disruptions, given the faltering progress toward a sustained recovery.
The worry is that raising the sales tax to 10 percent from the current 8 percent — a move already postponed once due to the outsized negative impact of the last sales tax hike — could hurt revenues more than help if the economy falls back into recession.
But holding off on the sales tax hike would undermine efforts to repair the government's tattered finances.
The overall growth figure likely got a small boost from the extra leap year day in February, economists said.
Private consumption, which accounts for the largest share of growth, rose 1.9 percent in annual terms in January-March, while public demand expanded by 2.6 percent. Business investment fell 5.3 percent and spending on housing also declined.
Under Abe, who took office in late 2012, Japan's policymakers have tried to spur growth by pumping cash into the economy through central bank asset purchases, stronger public spending and other strategies meant to convince consumers and businesses to spend, by creating demand that would fuel a "virtuous cycle" of growth.
After three years, the recovery is still limping along.
"Consumer spending made a solid contribution to growth in the first quarter, but weak business and residential investment prevented Japan's economy from reaching escape velocity," Bill Adams, senior international economist at PNC Financial Services Group, said in a note.
A recent surge in the value of the yen, combined with a recovery in oil prices, has raised costs for businesses and cut into the profits of exporters. That has left them even less willing to invest or raise wages. Consumers, in turn, have remained frugal, nervous over the future outlook and likely cuts to public support for pensions and health costs.
Japan's Nikkei 225 stock index slipped 0.1 percent to 16,644.69, while the dollar was flat at 109.14 yen.
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