By and  on August 13, 2012

TOKYO — Japan's economy grew at a slower-than-expected pace in the second quarter of the year, increasing just 1.4 percent at an annualized rate, the country's Cabinet Office said Monday.

That figure comes after Japan saw a strong economic rebound in the first three months of the year. First-quarter gross domestic product grew at annualized pace of 4.1 percent in preliminary terms — a number that was subsequently revised up to 5.5 percent.

Robust government spending to fuel recovery efforts from last year's tsunami fueled much of the growth in the first quarter but that slowed significantly in the second quarter, April to June. Annualized public investment growth slowed to 7.2 percent in the second quarter from 15.2 percent in the first quarter.

Export growth a noticeable hit in the second quarter, dropping to 4.8 percent from 14.3 percent in the first quarter in annualized terms.

Import growth slowed to 6.4 percent in the second quarter to 6.4 percent from 9.1 percent in the first three months of the year.

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Consumer spending also slowed dramatically in annualized terms, rising just 0.6 percent in the second quarter compared to 5 percent growth in the first quarter.

"We think consumer spending held up well considering that there was no longer a reactive boost from post-quake consumption restraint and that a reaction to the leap year effect was expected," Shuichi Obata, a senior economist at Nomura, said in a report published Monday.

"Personal consumption has received significant support from government policies such as eco-car subsidies. The subsidy program runs to end-January 2013 but the budget seems likely to be used up in August and we are watching for a fallback in personal consumption from September," said Naohiko Baba of Goldman Sachs' Tokyo office.

Despite slower growth than expected in the second quarter, economists are optimistic that Japan's GDP will continue to grow in the third quarter.

"Looking at the overall picture, Q2 real GDP growth came in lower than the consensus forecast, but in our view the data suggest a high likelihood of continued economic recovery from Q3," Obata said.

However, growth of personal consumption is expected to slow considerably toward the fourth quarter of he year.

"We expect personal consumption to slow to almost zero growth toward 4Q 2012,” said a Goldman Sachs report by Baba, Chiwoong Lee and Yuriko Tanaka, published Monday. “The budget for eco-car subsidies is likely to be used up in August, and we expect spending on autos to fade. In addition, consumption has been buoyed by evaporation of post-quake restraint since the spring and we do not think this boost will last.”

On Friday, Japan's Diet passed a bill to raise the country's consumption tax from its current level of five percent to 8 percent in April 2014, then to 10 percent in October 2015. Some observers expect an initial surge in spending before the tax hike takes effect, followed by decreased consumption rates.

“The increase will cause large swings in the economy due to front-loading of personal consumption and housing investment and the subsequent backlash,” said the Goldman Sachs report.

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