TOKYO Japan's economy rebounded from recession in the final quarter of last year but growth was weaker than expected as household and corporate spending disappointed, underlining the challenge premier Shinzo Abe faces in shaking off decades of stagnation.
The annualized 2.2 percent expansion in October-December was smaller than a 3.7 percent increase forecast in a Reuters poll, suggesting a fragile recovery as the hangover from last year's sales tax hike lingered.
The preliminary reading for gross domestic product (GDP), which translates into a quarter-on-quarter increase of 0.6 percent, follows two straight quarters of contraction, data by the Cabinet Office showed on Monday.
Economic Minister Akira Amari told reporters after the data's release that the economy was on track for a recovery with signs consumer sentiment is picking up.
But analysts pointed to the weak rebound in consumption and capital expenditure as worrying signs to the outlook.
"These are somewhat disappointing figures," said Takeshi Minami, chief economist at Norinchukin Research Institute. "The situation remains weak and companies are clearly postponing investments."
BOJ ON HOLD
The rebound from recession, however, will allow the Bank of Japan to hold off on expanding monetary stimulus for now even as slumping oil prices push inflation further away from its 2 percent target, analysts say.
"The BOJ is expected to keep monetary policy unchanged for a while to see the impact from the latest easing," said Taro Saito, director of economic research at NLI Research Institute.
The data will be one of the key factors the BOJ will scrutinize at its two-day rate review ending on Wednesday, where it is widely set to maintain the current pace of asset purchases in its monetary stimulus program.
Private consumption, which makes up about 60 percent of the economy, rose 0.3 percent in the final quarter, less than a median market forecast for a 0.7 percent increase.
Capital expenditure also rose just 0.1 percent after two straight quarters of declines, suggesting the BOJ's aggressive money printing has yet to nudge firms into boosting investment.
In a glimmer of hope, external demand added 0.2 percentage point to growth on robust shipments to the United States and China, Japan's two biggest export destinations.
One of the biggest headwinds for Japan is a deteriorating global economic outlook, which has triggered a wave of monetary easings around the world to fight of deflationary pressures and prop up growth.
But Japanese policymakers are hoping a rebound in exports, which had been a soft spot in the economy despite support from a weak yen, and lower fuel costs will encourage firms to spend more on wages and expenditure.
"The economy will recover backed by firm domestic demand as Japan's terms of trade improves on oil price falls," Amari said.
Japan's economy slid into recession in July-September last year, prompting Abe to delay a second sales tax hike initially scheduled in October 2015.
The slump slowed Japan's quest to beat off nearly two decades of grinding deflation, and forced the BOJ into expanding monetary stimulus in October last year.
(Additional reporting by Stanley White, Mari Saito and Kaori Kaneko; Editing by Shri Navaratnam)