With a hike in sales tax expected in April -- part of Prime Minister Shinzo Abe's stimulus plan -- one of the major causes of worry is Japan's weak exports and a trade deficit that is growing because of increased imports. Weak GDP growth could lead to an extended stimulus by the Bank of Japan and more action will be needed from Abe to help the country become more competitive in the world market.
Business investment rose 1.3 percent from the previous quarter and consumer spending rose 0.5 percent. While exports rose by 0.4 percent, imports surged by 3.5 percent. This high trade deficit coupled with lackluster consumer confidence could lead to weaker growth once the sales tax kicks in.
The weak GDP numbers were below analyst expectations, lower than the 2.8 percent predicted by a Bloomberg survey of 37 economists. It seems like Abe will now have to work harder on his strategy to bring about structural reforms, to supplement the progress made on the fiscal and monetary policy.
The weak growth follows an annualized growth of 1.1 percent for the previous three quarters. Analysts are already predicting a drop in the GDP for the April to June period, when the sales tax will rise from 5 percent to 8 percent.