TOKYO (AP) — Japan's economy grew a slower-than-expected 2.6 percent last quarter as companies wary over the prospects for a sustained recovery kept a tight rein on investment.
On a quarter-to-quarter basis, the world's third-largest economy grew 0.6 percent in April-June from the previous quarter, the Cabinet Office said Monday in its preliminary estimate.
Japan's public debt surpassed the 1 quadrillion yen ($10.4 trillion) mark last week and the country needs a strong recovery to boost tax revenues enough to begin reducing its debt burden.
Analysts had forecast annualized growth of 3 percent or higher for the quarter. The economy expanded at a revised 3.8 percent pace in January-March.
The weaker data will likely raise pressure on Prime Minister Shinzo Abe to push ahead with reforms he has promised to help improve Japan's competitiveness and sustain growth in the long run. It might also encourage the government to postpone a planned increase in sales tax.
Masamichi Adachi, an economist at JPMorgan in Tokyo, said public spending did not rise as quickly as planned in the April-June quarter so extra money for projects in the pipeline will likely boost growth in the coming months.
"We can expect accelerated spending in the latter half of the year," he said. "This is decent enough to say the Japanese economy is maintaining solid momentum."
If forecasts for a continued fall-off in growth in the current quarter are accurate, however, the calls for more radical reforms are bound to build, as investors watch for signs that Abe's "Abenomics strategy" can really fuel a lasting recovery from years of stagnation.
The data show the strongest contribution to growth last quarter came from public spending and exports, while private investment weakened.
Many of Japan's corporations have enjoyed higher profits due to the yen's fall against other currencies, boosting the value of their overseas earnings when they are counted in yen terms. The recovery in exports has been a boon for big global corporations such as Toyota Motor Corp.
But corporate investment has remained flat, falling 0.1 percent in April to June. Residential investment also weakened, despite signs of a recovery in housing construction.
Meanwhile, wages have risen only for some workers, accentuating concerns over whether household income will keep pace as prices rise under the government's campaign to end deflation through extreme monetary easing.
Abe and some of his advisers have expressed uncertainty over a government commitment to raise the sales tax by 3 percentage points in April. A decision on that is due within months, and it appears increasingly likely Abe might opt for a more gradual approach to raising the tax, which now stands at 5 percent, to help improve public finances.
"The GDP data is a good figure," said Economics Minister Akira Amari, who has been quoted as saying that raising the sales tax is "not optional."
The government has said it is considering increasing tax incentives for corporate investment, among other options, to spur private spending.
"Personal consumption is expected to continue to rise gradually, but given that investment is weaker than consumption, we need to support a recovery in capital investment," he said.
Follow Elaine Kurtenbach on Twitter: http://www.twitter.com/ekurtenbach