Japan economy expands much more than expected, dodges recession in Q1

With private consumption making only a feeble recovery from last quarter's slump, the data keeps alive market expectations that Prime Minister Shinzo Abe will delay a scheduled sales tax hike next year, analysts said.

The world's third-largest economy expanded by an annualized 1.7 percent in January-March, much more than a median market forecast for a 0.2 percent increase and rebounding from a 1.7 percent contraction in the previous quarter, Cabinet Office data showed on Wednesday.

Many analysts say the economy only narrowly dodged recession, defined as two straight quarters of contraction, after stripping out the estimated boost from the leap year.

"Taking into account the effects of the extra day from the leap year, which pushed up the quarter-on-quarter growth rate by 0.3 percentage point, growth is not as strong as the headline number shows," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

"The GDP data will likely press Abe to decide to delay a planned sales tax hike next year and to roll out additional fiscal stimulus worth at least 5 trillion yen. I also expect the Bank of Japan to ease policy further in July given weak growth and tame inflation."

Economy Minister Nobuteru Ishihara told reporters after the data that while the economy continues to recover moderately, the government is ready to take a "flexible policy response" to risks such as volatile markets and weak demand in emerging economies.

Private consumption, which makes up 60 percent of GDP, rose 0.5 percent, more than double the median market forecast, as households boosted spending on televisions, food and beverage, and recreation, the data showed. But the rebound failed to make up for a 0.8 percent drop in the previous quarter.

Local and overseas demand both added 0.2 percentage point each to gross domestic product (GDP) growth, thanks in part to a 0.6 percent rise in exports.

On quarter-on-quarter basis, the economy grew 0.4 percent in January to March.

Government officials have said the data will be crucial in Abe's decision on whether to postpone a sales tax hike scheduled for next year.

The data also comes ahead of a Group of Seven leaders' summit Abe will host in western Japan next week, where he hopes to foster agreement on the need for global coordination of policies to jump-start growth.

Japan's economy contracted in the final quarter of last year as slow wage growth hurt private consumption, while exports felt the pinch from sluggish emerging market demand and the pain of a strong yen.

Abe raised the sales tax to 8 percent from 5 percent in 2014, which tipped the economy into recession. That led Abe to delay a second tax hike to 10 percent by 18 months.