(Bloomberg) -- Japan’s economy unexpectedly grew during the first quarter, despite slowing global growth and trade tensions hitting exports and business investment. The result may cool a growing debate over a tax increase for now.

Gross domestic product expanded an annualized 2.1% in the three months through March, according to a Cabinet Office report Monday. That compares with economists’ median estimate for a contraction of 0.2%.

Key Insights

  • Slowing global growth--especially in China, Japan’s biggest market--and rising trade tensions have hit corporate sentiment and business investment, which had supported Japan’s economy for most of the past two years.
  • Consumer demand has been soft. A measure of household spending has improved recently but wages continue to disappoint. Overall, private consumption figures suggest the Bank of Japan’s virtuous economic cycle remains incomplete.
  • The unexpected strength in Japan’s economy may cool speculation that Prime Minister Shinzo Abe will delay a potentially fraught sales-tax hike scheduled for October.
  • The fate of the tax hike is becoming more uncertain, with the outlook for the Japanese and global economies in the second half of the year now taking on far more importance, said Masaaki Kanno, chief economist at Sony Financial Holdings Inc.

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  • Exports declined 2.4% from the previous quarter.
  • Business investment fell 0.3% from the previous quarter, versus economists’ median estimate of -1.9%.
  • Private consumption dropped 0.1% from the previous quarter. The median estimate was for a 0.2% loss.

To contact the reporters on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net;Shiho Takezawa in Tokyo at stakezawa2@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig

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