Japan economy shrinks 6.8 per cent, most since tsunami, as tax rise bites

Contraction is biggest since 2011 earthquake, but government takes a relaxed view

PUBLISHED : Wednesday, 13 August, 2014, 9:56am
UPDATED : Thursday, 14 August, 2014, 5:41pm

Japan suffered its biggest economic contraction since the March 2011 earthquake as a sales tax increase took a heavy toll on household spending in the April-June quarter, stoking fears that any rebound may be too modest to sustain a solid recovery.

While the news is unlikely to shake the Bank of Japan's conviction that the economy can ride out the impact of the rise in tax, it could add pressure on the bank for further monetary easing if weakness in exports and consumption is prolonged.

The world's third-largest economy shrank an annualised 6.8 per cent in the second quarter, less than a median market forecast for a 7.1 per cent drop. It followed a 6.1 per cent increase in the January-March quarter as consumers spent heavily to avoid the sales tax increase, Cabinet Office data showed.

The government took a relaxed view, with Economics Minister Akira Amari saying: "Looking at monthly data during April-June, sales of electronics goods and those at department stores are picking up after falling sharply in April.

"The job market is also improving steadily. Taking these into account, Japan's economy continues to recover moderately as a trend and the effect of the sales tax hike is subsiding."

The second-quarter contraction was the biggest decline since the first quarter of 2011, when the devastating earthquake and tsunami struck in March.

On a quarter-to-quarter basis, Japan's economy shrank 1.7 per cent in the second quarter, less than a median market forecast for a 1.8 per cent fall.

"The economy will rebound to annualised growth around 5 per cent in July-September" due to strong summer bonuses and public works spending, said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The BOJ remains focused on prices, and it could ease again in October when it reviews its economic outlook, with prices likely undershooting its projections."

Private consumption, about 60 per cent of the economy, took a hit from the sales tax increase and fell 5 per cent in the quarter, more than a median market forecast for a 4.3 per cent drop.

Exports showed signs of a recovery from recent weakness. External demand added 1.1 percentage points to growth, after shaving 0.2 percentage points off growth in the first quarter.

The BOJ has kept monetary policy steady since deploying a burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate inflation to 2 per cent in two years.