Japan's economy grew more than expected in the first quarter, data showed Wednesday, as it crawls back from a brief recession, but observers cautioned that a full recovery may still be some way off.
The 0.6 percent on-quarter expansion was bigger than revised 0.3 percent growth in the last three months of 2014, and beat market expectations for a 0.4 percent rise.
In annualised terms, the world's number three economy expanded 2.4 percent January-March as capital spending and the housing market showed signs of strength, although exports dipped slightly and consumer spending was weak.
The relatively upbeat figures -- outpacing a lacklustre 0.2 percent annualised rise in the US economy during the same period -- may cool expectations of imminent stimulus from the Bank of Japan (BoJ), after a sales tax rise last year hammered consumer spending.
The sales levy hike -- Japan's first in 17 years -- plunged the economy into recession and threw Prime Minister Shinzo Abe's growth-boosting programme, dubbed Abenomics, into question.
Investors embraced Wednesday's growth figures, pushing the benchmark Nikkei 225 index up 0.85 percent to a fresh 15-year high of 20,196.56, as Japan wraps up its latest earnings season with many firms reporting strong profits, largely owing to a weak yen.
"The January-March (gross domestic product) growth data were good... and buoyed sentiment," said Takuya Takahashi, senior strategist at Daiwa Securities.
"Corporate earnings for the fiscal year to March were (also) generally good and many companies took measures to return surplus to shareholders," he added, referring to share buybacks and dividend hikes.
But some are warning that, despite the pick-up, Japan's full-year growth may come in flat, as firms' rising inventories underscore still-lacklustre consumer spending.
"The acceleration in GDP growth last quarter was mostly due to a jump in inventories, and a range of indicators point to a slowdown in the second quarter," Marcel Thieliant from Capital Economics said in a commentary.
"Industrial production in March was four percent below its January peak, and the drop in the manufacturing PMI (purchasing managers' index) to a multi-month low in April suggests that conditions are unlikely to improve quickly."
- Cautious households -
The sales tax rise from 5.0 percent to 8.0 percent was introduced to help pay down Japan's enormous national debt, one of the biggest among wealthy nations. Faced with souring economic data, Abe delayed a second hike planned for this year to 2017.
And it remains unclear if the wage hikes announced by many of Japan's biggest companies after annual negotiations would convince consumers to buy more.
"Consumer spending is likely to remain weak until better results of annual wage negotiations between large companies and unions spill over to small- and medium-sized enterprises," said Harumi Taguchi, principal economist at IHS Economics in Tokyo.
"The keys to growth are the extent of the benefits from low oil prices and wage increases at large companies flowing into the broader economy."
Japan has been struggling with a string of tepid data recently, particularly on the price side as efforts to reach the BoJ's 2.0 percent inflation target look increasingly out of reach.
The central bank, which kicks off a two-day policy meeting Thursday, has now conceded the original timeline for achieving its goal would be missed, while it has also cut its growth forecasts.
Japanese inflation in March picked up for the first time in 10 months, but stripping out the impact of the sales tax rise, it came in at a tepid 0.2 percent.
Sustained inflation is a cornerstone of Abe's drive to conquer years of deflation and kickstart growth in the economy.
Deflation may sound good for Japanese consumers, but it means people tend to put off buying because they do not expect prices to rise and hope they might even get goods cheaper down the line.
That, in turn, hurts producers and holds back their expansion and hiring plans, which is bad news for the economy.