Japan's economy contracts by 6.8% on a yearly basis as tax hike bites in Q2

Wednesday 13 August 2014 07.39
New sales tax hits Japanese economy in the three months from April to June
New sales tax hits Japanese economy in the three months from April to June

Japan suffered its biggest economic contraction since the devastating March 2011 earthquake in the second quarter of this year as a sales tax hike took a heavy toll on household spending.

This fanned fears that any rebound may be too modest to sustain a solid recovery. 

The weak data is unlikely to shake the Bank of Japan's conviction that the economy can ride out the tax hike impact.

But  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% in the second quarter, less than a market forecast for a 7.1% drop.

It came after a 6.1% increase in the first quarter as consumers spent heavily to avoid the sales tax increase, Cabinet Office data showed today. 

The government took a relaxed view of the data.

"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," Japanese Economics Minister Akira Amari said.

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% in the second quarter, less than forecasts of a 1.8% fall. 

Private consumption, which makes up about 60% of Japan's economy, took a hit from the sales tax hike in April to fall 5% in the quarter, more than forecast.

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

The Bank of Japan has kept monetary policy steady since deploying an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate inflation to 2% in about two years. 

Its Governor Haruhiko Kuroda has repeatedly said he would not be surprised or fazed to see a contraction in April-June economic activity, which would largely be in reaction to a surge in demand ahead of the tax hike. 

He has argued that growth is set to rebound in the third quarter as tightening labour markets boost wages and support household spending. The central bank thus sees no need to expand monetary stimulus any time soon.

But some board members have offered a more cautious view on the outlook than Kuroda, warning that the rebound in July-September could be softer than expected as a much hoped-for pick-up in exports has been delayed. 

Exports unexpectedly fell in June for a second month in a row and output plunged at the fastest pace since the March 2011 earthquake, forcing the BOJ to revise down its assessments on exports and output last week.