Japan’s economy in largest contraction since 2011

A sales tax hike last quarter pushed Japan's economy into its biggest contraction since the March 2011 earthquake and tsunami, according to Cabinet Office data today, Reuters reported.

This kept policymakers under pressure for expansion of fiscal and monetary stimulus in the event  the recovery faltered again.

The 1 April sales tax hike hit household spending hard, shrinking the world's third-largest economy by an annualised 6.8 per cent from April through June, and wiping off the 6.1 per cent growth seen in January-March as consumers went on a shopping spree for avoidance of higher tax.

The median market forecast pointed to a 7.1 per cent drop.

However, considering the slump as a temporary phenomenon, the Bank of Japan (BOJ) remained convinced the economy was on course for a moderate recovery and had no plans for expansion of stimulus any time soon.

According to commentators though, the soft data could force the central bank to cut its rosy fiscal year economic projections while reviewing them in October.

In the event of a weak third quarter growth, the BOJ might also come under pressure to add stimulus – particularly before prime minister Shinzo Abe decided later this year whether to implement a second sales tax hike from 8 to 10 per cent in October next year, analysts said, according to Retuers.

However, the government appeared unperturbed with the development, with economics minister Akira Amari saying, looking at monthly data during April-June, sales of electronics goods and those at department stores were picking up after dropping sharply in April, Sky News reported.

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

The tax increase would have temporary effect with spending increasing in coming months, according to economists.

With his 'Abenomics' strategy, prime minister Shinzo Abe looked to pull the world's third-biggest economy out of two decades of stagnation through a host of measures including stepping up money supply, freeing up regulations and encouraging the yen's fall.

However the government had been concerned about ballooning public debt and acted through the sales tax increase breaking out of the reluctance of previous administrations, which feared such a move might trigger a recession.

According to Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, the GDP slowdown reflected not only the tax hike but also lower incomes and price increases from other sources.