• Bloomberg, Reuters, Kyodo

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Japan’s economy dodged a recession last quarter as gains in government and consumer spending compensated for a slide in business investment.

Gross domestic product expanded by an annualized 1.7 percent in the first three months of this year, government figures showed Wednesday.

The October-December quarter was revised to a 1.7 percent contraction, worse than the previous estimate of a 1.1 percent drop.

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 decline in capital spending suggested that companies remain reluctant to deploy their stockpiles of cash. It also underscored that Japan has a long way to go before pulling free of the cycle of expansion and contraction that has plagued the economy for decades.

The leap year provided an extra day of production and spending to bolster the data, and the outlook remains challenging given the resurgent yen and the possibility of a sales-tax hike in 2017.

Analysts had worried that the January-March period would not produce enough growth to avert 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. I also expect the Bank of Japan to ease policy further in July given weak growth and tame inflation.”

Following the data, Koichi Hamada, an emeritus professor of economics at Yale University and key economic adviser to Abe, reiterated his opposition to the planned tax hike, which he told lawmakers would cause “quite a confusion.”

Chief Cabinet Secretary Yoshihide Suga told a news conference after the data that Japan is making steady progress toward beating deflation but private consumption continues to be weak with the effect of a sales tax hike in 2014 remaining.

Later in the day, a Finance Ministry advisory panel demanded the government “steadily implement” a scheduled hike in the consumption tax in April next year to 10 percent from the current 8 percent to fund social security.

The Fiscal System Council also urged the government to use a tax revenue increase to slash government debt, citingthe lessons from the Greek financial crisis.

“If there are higher-than-expected tax revenues, they need to be used to reduce debts in principle, rather than to increase expenditures,” the panel said in a set of recommendations handed to Finance Minister Taro Aso.

Despite more than three years of Abenomics and record monetary stimulus from the central bank, business spending fell 1.4 percent in the first quarter from the previous three months. Private consumption rose 0.5 percent from the previous period, when it dropped a revised 0.8 percent.

For the fiscal year through March, nominal GDP rose 2.2 percent, the largest gain in data back at least through 1997. The government’s ultimate goal is 3 percent.

Unadjusted for price changes, GDP rose 0.5 percent from the previous quarter, the same as the average in the previous three years.

Nominal GDP figures showed consumption, residential investment and capital spending all fell. Government spending rose.

Inflation pressures are easing, with the GDP deflator rising 0.9 percent from a year before, the least in two years.

There was good news on the wage front, with compensation rising 0.6 percent from the previous quarter, after a 0.5 percent advance.

Net exports contributed 0.2 percentage points to quarterly growth.

“By having one extra day, people will eat more and spend more,” said Kohei Iwahara, the Tokyo-based director of economic research at Natixis SA. “This seemingly trivial point can make a difference when consumer confidence is falling and wage growth is subdued.”

Consumer spending, which accounts for about 60 percent of GDP, is likely to weigh heavily on the mind of Abe as he contemplates whether to delay increasing the sales tax to 10 percent from the current 8 percent. A previous hike in the levy in 2014 pushed the economy into recession.

The Nikkei newspaper reported that Abe has decided to postpone the move and will probably make his decision public after hosting global leaders at a Group of Seven nations summit next week. Senior officials in the ruling Liberal Democratic Party said the prime minister has not made a decision on the matter.

“The government would need to avoid raising the consumption tax and to assemble a supplemental fiscal package,” said Iwahara.

Hiroaki Muto, chief economist at Tokai Tokyo Research Center in Tokyo, said the economy will probably struggle to gather growth momentum because gains in the yen and declines in stocks threaten to hurt exporters, dimming the outlook for corporate spending.

The yen has strengthened 10 percent against the dollar this year while the Topix stock index has declined almost 14 percent. Toyota Motor Corp. said annual net income will probably decline for the first time in five years, as currency swings that had spurred record profits now pose stiff headwinds.

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