(Bloomberg) -- Japan’s economy unexpectedly grew during the first quarter, but most of the expansion resulted from imports falling even faster than exports, a sign of underlying weakness in demand.

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

• Imports fell 4.6% from the previous the quarter, versus a 2.4% decline in exports, resulting in the biggest contribution to the expansion of GDP, according to Cabinet Office officials. The drop in imports was led by crude oil and natural gas, they said.
• 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 headline figure 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.

Get More

• 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.

--With assistance from Tomoko Sato and Gearoid Reidy.

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, Paul Jackson

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.