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Japan's GDP miss – What went wrong?

Japan's economy grew at a much slower pace than expected at the end of 2013, stoking fears that Abenomics' momentum has stalled, but some economists say the dip will prove fleeting.

Japan's economy grew 0.3 percent in the fourth quarter of last year from the previous quarter, below analysts' expectations in a Reuters' poll for a 0.7 percent gain, data on Monday showed. On an annualized basis the economy grew 1 percent, below expectations of 2.8 percent.

"Weak Q4 GDP (gross domestic product) figures show that the surge in spending ahead of the consumption tax hike has yet to come," said Marcel Thieliant, Japan economist at Capital Economics.

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"Looking ahead, last-minute spending to avoid the higher sales tax will likely lead to a further acceleration in economic growth in the first quarter [of 2014], followed by a slump in the second quarter," he added.

Many economists have been expecting consumers to rush out and stock up on supplies prior to the sales tax hike due in April, which will raise consumption tax to 8 percent from 5 percent, in a move some fear could strangle Japan's economic recovery so far as consumers suffer negative wage growth.

Bloomberg Contributor | Bloomberg | Getty Images

However, as Capital Economics' Thieliant pointed out, the spending surge has not seemed to take hold yet, given the disappointing fourth quarter number.

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And according to IHS Global Insight's Japan economist Harumi Taguchi, weak growth in wages and rising fuel and food costs could have impinged on Japanese consumers' appetite to go out and spend in preparation for the tax hike.

Now, many economists are now arguing that the weaker-than-expected fourth quarter growth figure could prompt further easing from the Bank of Japan at this week's policy meeting concluded on Tuesday, sooner rather than later, helping boost 2014's growth levels.

"With real exports seriously under-performing and the recent rise in the yen, a further monetary easing step could be in the offing earlier than expected, possibly in a surprise move at the upcoming meeting," said Uwe Parpart, chief strategist at Reorient Group.

IHS's Taguchi added that she saw Japan's real GDP growth turning positive in the third quarter of 2014 as extra stimulus from the BOJ, combined with better external demand boosts the economy.

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Japan's growth in the fourth quarter was fueled by strong rises in private consumption – which grew 0.5 percent on quarter – and non-residential investment, which ticked up 1.3 percent on quarter.

However, faster private demand was offset by slower public demand, and a sharp decline in net exports, which shaved 0.5 percentage points off headline growth, lowered the overall figure.

And several economists flagged the sharp fall in machinery orders in December as a concern, which Capital Economics said raised the chances of a downward revision in second estimate of Q4 GDP due out on March 10.

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Prime Minister Shinzo Abe's ambitious plan to reform Japan's struggling economy has included aggressive monetary easing, fiscal stimulus and structural reform. Since it has been put into action, it has been effective in dragging Japan out of recession and helped stimulate a healthy level of inflation – last recorded at 1.3 percent year on year - but doubts remain over Abe's commitment to structural reform.

"It is now the turn for private sector to drive the economy and the third arrow: the growth strategy, which has not actually had an effect yet, and this is seen as the key for sustainable growth, as well as deregulation, which will be of key importance," said IHS's Taguchi.

In Asia trade on Monday the yen traded down 0.2 percent at 101.37 per dollar, its highest level against the dollar since February 6.

By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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