Japan Economy Returns to Growth in Q1, Avoids Recession

Japan sidestepped a recession after its economy grew in the first quarter, preliminary data showed Wednesday, but efforts to cement recovery in the world's number three economy were gaining little traction.

Gross domestic product expanded by 0.4 percent between January and March -- or 1.7 percent at an annualised rate -- after a contraction in the last three months of 2015.

A consumer spending rebound helped drive the better than expected figures, but the leap year added another day of production -- and spending -- to the economy's performance.

The fresh data will do little to buoy hopes for Prime Minister Shinzo Abe's faltering growth blitz.

His bid to revive Japan's once-soaring economy, dubbed Abenomics, was shaken by a bloodbath on equity markets at the start of the year and a resurgent yen which has taken a bite out of Japan Inc's profits.

Local media have suggested Abe will delay plans to raise Japan's consumption tax over concerns it could damage the already fragile economy.

But the premier on Wednesday insisted his growth plan was making headway, and that no final decision has been made on the levy increase.

"I will make the appropriate decision at an appropriate time," he told reporters.

A consumption tax rise in 2014 -- seen as key to helping pay down Japan's enormous national debt -- was blamed for ushering in a brief recession.

This week the government approved a 778 billion yen ($7.1 billion) extra budget in response to April's deadly earthquakes, which prompted factory shutdowns in southern Japan.

"But even if the government delays the tax hike, it still needs to set a course for getting public finances on a sound footing, which is not an easy job," said Yoko Takeda, chief economist at Mitsubishi Research Institute.

"The economy is in a tough situation with the strong yen hurting corporate earnings, stalled wages and a lack of confidence among consumers. There are going to be some tough times ahead."

- Growth challenge -Wednesday's figures came days before Japan hosts a meeting of the Group of Seven finance chiefs, followed by a summit of their leaders next week.

The finance group -- including U.S. Treasury Secretary Jack Lew and European Central Bank President Mario Draghi -- converge at a hot springs town north of Tokyo, where two days of meetings kick off on Friday.

Topping the agenda will be how the group of rich nations can help kickstart global growth, as the host struggles to light a fire under its own economy.

Abe's growth plan -- big government spending, central bank monetary easing and reforms to the highly regulated economy -- initially appeared to bear fruit after he came to power in late 2012 elections.

The yen weakened sharply, which boosted Japanese exporters' profits and sparked a huge stock market rally.

But sustained growth has been elusive and Abe's efforts to overhaul the economy have been widely criticised as half-hearted.

Key to the plan is a massive monetary easing campaign from the Bank of Japan aimed at dragging Japan out of years of deflation -- a spiral of falling prices that held back growth.

In January the central bank shocked markets with a negative interest rate policy designed to boost lending to people and businesses. But the move was widely criticised as a desperate bid to prop up Tokyo's faltering economic plan.

The uptick in demand for durable goods such as cars and household appliances is good news, but the GDP figures suggest the BoJ's rate policy was having little impact on the economy, said Shotaro Kugo, an economist at Daiwa Institute of Research.

"We don't really see the policy working, as both private residential and non-residential investment (capital spending) shrank during that time," he told Agence France Presse.

In April a closely watched BoJ survey showed sentiment among Japan's biggest manufacturers dropped to its lowest level since Abe started his much-vaunted programme to boost growth.

The International Monetary Fund last month cut its growth forecast for Japan, and warned that inflation would sink into negative territory this year.