Japan Q2 growth slower than expected at 2.6%

Japan's economy grew an annualised 2.6 percent in April-June, a third straight quarter of expansion but slower than expected, which may heighten calls to delay a planned sales tax hike to ensure the country makes a sustained escape from deflation.

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The expansion was smaller than a downwardly revised 3.8 percent increase in the first quarter, when the launch of Prime Minister Shinzo Abe's stimulus policies drove up share prices and led to exceptionally strong personal consumption.

The reading compared with a median market forecast for a 3.6 percent increase. Capital expenditure unexpectedly fell, a sign companies are yet to boost spending despite the feel-good mood generated by Abe's reflationary policies.

On a quarter-to-quarter basis, the world's third-largest economy grew 0.6 percent in April-June. External demand added 0.2 percentage point to growth, while domestic demand contributed 0.5 point, data released by the Cabinet Office showed on Monday.

Private consumption rose 0.8 percent from the previous quarter, more than a median market forecast of a 0.5 percent increase, on robust spending on food, travel and consumer electronics.

But capital expenditure slid 0.1 percent, much weaker than a median market forecast for a 0.7 percent increase and marking the sixth straight quarter of decline.

Abe was elected last December on a platform of aggressive fiscal and monetary stimulus to revive Japan's economy. An immediate impact of his policies was a sharp weakening of the yen and rally in share prices over the first half of 2013, but the long-term impact is uncertain.

Japan is due to raise its 5 percent sales tax rate to 8 percent next April and then to 10 percent in October 2015, as part of efforts to curb its massive public debt.

The GDP data may weaken the case for Abe to go ahead with the tax hike, as sources said he is worried it may dampen spending and delay Japan's escape from deflation.

BOJ Governor Haruhiko Kuroda has said the tax hikes are needed. At more than twice the size of its 500 trillion yen economy, Japan's debt is proportionally the largest among major industrialised nations.

Government officials have said the preliminary GDP data and revised figures due on September 9 would be key factors in the tax debate, with a final decision possible by early October.

Critics of the planned two-stage tax hike are calling for a delay or at least a more moderate pace of increase.