STORY: Japan has become a nation of reluctant spenders, and that spells trouble for the economy.

Figures out Thursday showed GDP shrinking 2% over the January-March quarter.

That was worse than economists expected, and consumer spending is a big part of the problem.

Private consumption - which accounts for more than half of the economy - fell 0.7%.

That was several times worse than forecast, and the fourth straight quarter of decline.

Policymakers are now banking on rising wages and income tax cuts to spur demand.

One economist told Reuters that such factors were sure to drive gains over the coming months, saying the economy had now bottomed out.

But a weak yen is a worry, making imports more expensive and squeezing consumption.

A wobbly global economy doesn't help either, with demand for exports uncertain.

It all adds up to a dilemma for the Bank of Japan over interest rates.

Governor Kazuo Ueda started raising rates in March for the first time since 2007.

More hikes had been widely expected, but may now come more slowly if the economy shows further signs of weakness.