Japan's economy slowed in the last quarter, data showed Monday, raising questions about whether Tokyo would go ahead with sales tax hikes that some fear could derail its bid to stoke growth.
The new figures painted a mixed picture of firming consumer consumption but little evidence that companies are confident enough to start spending big on new investment and hiring more workers.
The state of the world's third-largest economy is a key issue for the administration of Japanese Prime Minister Shinzo Abe, which is mulling whether a series of sales tax hikes aimed at doubling the rate to 10 percent by 2015.
They are seen as crucial for raising fresh revenue to chop Japan's eye-watering national debt — proportionately the worst among industrialised nations — but there are fears it could stall Tokyo's stimulus plan, dubbed "Abenomics".
"Private investment was quite weak, which is one of the main factors behind the slower-than-expected growth," Japan Research Institute analyst Hideki Matsumura told AFP.
Matsumura added that "growth was not so bad and it's expected to get better in the coming quarters thanks to the weak yen and other encouraging factors".
"It is still strong enough to let the government introduce the planned tax hike, but that is sensitive politically. A final decision will be based on politics, not the economy."
On Monday, the Cabinet office said the economy expanded by weaker-than-expected 0.6 percent from the previous quarter, from a revised 0.9 percent increase between January and March.
The pace of expansion also slowed on an annualised basis with a 2.6 percent increase, from a revised 3.8 percent jump in the first quarter. Annualised data show how the economy would grow if the quarterly performance was stretched across the full year.
Also Monday, revised industrial production data for June showed a surprise drop in factory output was not as bad as previously thought with production down 3.1 percent rather than 3.3 percent.
Abe's plan is aimed at a broad economic recovery that drags Japan out of the deflation which has plagued its economy for years.
But analysts say a two-percent inflation target set by the Bank of Japan earlier this year still looks a long way off.
The premier and his economy minister put an upbeat spin on the results Monday, saying tax increases approved by the previous administration were still on the table.
"The economy is picking up," Abe told reporters Monday, pointing to "further growth strategies this autumn" without elaborating.
Economy Minister Akira Amari added that GDP figures were key for pulling the trigger on any tax hikes.
"The prime minister will make a final decision this autumn," he said.
Japanese officials are playing a delicate balancing act by addressing worries over a mounting national debt while using big government spending and central bank monetary easing in a bid to kickstart growth and conquer deflation.
Last week, the International Monetary Fund called on Tokyo to come up with a "credible" plan to balance its books, as the Bank of Japan left unchanged a vast monetary easing plan which is a key part of Tokyo's bid to breathe new life into the economy.
The idea is to get consumers spending again. Falling prices have held back growth for years as households put off purchases in the hopes of getting them cheaper down the road, which in turn hurt producers and held back new hiring and investment.
Wages have barely budged, although some firms have announced recent salary hikes.
"Consumption has gotten better on spending on some luxury items, but things will really take off when a rise in disposable income starts a virtuous cycle of consumption," Sei Sugimoto, head of investment planning at Mitsui Life Insurance, told Dow Jones Newswires.
"We're not there yet."