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Japan's economy contracted in the April-June quarter after companies and consumers cut spending following a sales tax increase. Photo: AP

Japan’s economy shrinks in second quarter as sales tax rise hits

Rise in sales tax blamed as economy contractsby 7.1 per cent,worse than initial estimates

Japan's economy shrank an annualised 7.1 per cent in the April-June quarter, more than a preliminary estimate, underscoring concerns the hit from an April increase in the sales tax may have been bigger than expected.

The revised contraction was the biggest since January-March 2009, when the global financial crisis affected Japan's exports and factory output, keeping policymakers under pressure to expand fiscal and monetary stimulus should the economy fail to recover from the disruption of the April tax rise.

"Growth this year will be less than what policymakers are expecting. The BOJ will ease policy in April because inflation will be too low to meet its target," said Takuji Aida, the chief economist at Societe Generale Securities.

The revision was largely due to a bigger-than-expected drop in capital expenditure and a deeper decline in consumer spending, suggesting the economy could struggle to overcome the sales tax increase.

Gross domestic product was revised down from a preliminary 6.8 per cent drop, according to Cabinet Office data released yesterday. Policymakers had predicted the economy would shrink in the April-June quarter as consumers withheld spending after a shopping spree before the sales tax rise to 8 per cent from 5 per cent on April 1.

A recent run of weak data, including a slump in household spending and tepid output growth in July, has cast doubt on the policymakers' forecast the economy will rebound steadily to sustain a moderate recovery.

The pace of growth from July will be crucial to Prime Minister Shinzo Abe's decision, expected by the end of the year, on whether to proceed with a scheduled second increase in the sales tax to 10 per cent in October next year.

On a quarter-to-quarter basis, the economy shrank 1.8 per cent in the second quarter, compared with a preliminary reading of a 1.7 per cent contraction.

Separate data showed the current account swung back into surplus in July. The surplus stood at 416.7 billion yen (HK$30.7 billion), compared with economists' forecast for 444.2 billion yen. That followed a shortfall of 399.1 billion yen in June, the first deficit in five months.

Exports were starting to recover, so as long as the economy expanded in the July-September period, Abe would go ahead with the second sales tax rise, Aida said, but added Tokyo would launch a fiscal stimulus package to soften the higher tax's impact.

If the recovery falters, it will also raise pressure on the Bank of Japan to expand the already massive monetary stimulus that it deployed in April last year to raise the economy out of deflation and reach a 2 per cent inflation target.

Governor Haruhiko Kuroda has expressed confidence the central bank can meet its inflation target in fiscal 2015.

This article appeared in the South China Morning Post print edition as: Japan GDP shrinks most in five years
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