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Japanese data are improving…But Abe’s still likely to delay sales tax hike

A handful of April readings on Japan's economy came in better than expected, but analysts don't think that will deter Prime Minister Shinzo Abe's apparent drive to delay a planned sales tax hike.

The sales tax delay is "pretty much a done deal," Marcel Thieliant, senior Japan economist at Capital Economics, said in a phone interview. "If he's made up his mind, I don't think today's data will change anything."

The data released before the market open on Tuesday painted a slightly healthier picture of Japan's economy, but Thieliant noted the figures weren't particularly strong.

Industrial production in April rose 0.3 percent from the previous month, coming in well above expectations for a 1.5 percent contraction in the wake of disruptions caused by an earthquake.

Other data also beat expectations.

Household spending in April rose 0.2 percent from the previous month, compared with forecasts from a Reuters poll for a 0.6 percent drop. On a year-on-year basis, household spending fell 0.4 percent, but that still beat a Reuters poll forecast for a 1.4 percent drop.

Abe appears to be floating the idea of delaying a sales tax hike planned for 2017 amid anemic economic growth and essentially non-existent inflation. The hike, originally planned for October, has already been delayed once.

Reuters reported Monday, citing a senior ruling party official, that Abe said he would delay the sales tax hike by two and a half years. Local media Jiji Press reported, citing sources, that Abe would make an announcement on the tax on Wednesday.

Previously, Abe has said he would delay the 2017 sales tax hike only if there's a large natural disaster or a 2008-style crisis.

Analysts say that's likely why Abe took the opportunity at the G7 conference last week to warn a potential Lehman-style crisis is looming amid the prolonged slump in commodity prices.

Other analysts also expect another delay is on the cards.

After all the recent talk of a delay in the media, "[Abe] can't retreat now. If he did, he would lose face," said Edwin Merner, president at Atlantis Investment Research.

While the data released today are a bit healthier, if Abe says the tax hike will proceed, he'll look like he's been "asleep" if the economy deteriorates in the months ahead, Merner said.

Merner also noted that lower house elections are looming in 2017 and if the tax increase knocks the economy, that would bode ill for Abe's prospects.

Others also pointed to the political positives for Abe of delaying the tax hike. But there are concerns over the move.

"It's one very easy show of supporting consumption and also it's a way of flexing political muscle," Naomi Fink, CEO of Europacifica Consulting, told CNBC."My main worry remains that this sends the wrong message with regards to fiscal credibility."

The consumption tax hike was part of Abe's plan to pare the nation's bulging debt pile, currently exceeding 200 percent of gross domestic product (GDP).

Nyshka Chandran contributed to this article.

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