A sales tax hike last quarter drove Japan’s economy into its biggest contraction since the March 2011 earthquake and tsunami, Cabinet Office data showed on Wednesday, keeping policymakers under pressure to expand fiscal and monetary stimulus should recovery falter again.
The April 1 sales tax hike took a heavy toll on household spending, shrinking the world’s third-largest economy by an annualised 6.8 per cent from April through June, and wiping out growth of 6.1 percent seen in January-March as consumers went on a shopping spree to avoid the higher tax.
Seeing the slump as temporary, however, the Bank of Japan remains publicly convinced the economy is on course for a moderate recovery and has no plans to expand stimulus any time soon.
The soft data, though, could compel the central bank into trimming its rosy fiscal year economic projections when it reviews them in October.
If third quarter growth proves weak the Bank of Japan may also come under pressure to add stimulus - particularly before prime minister Shinzo Abe decides later this year whether to implement a second sales tax hike from 8 to 10 per cent in October next year, analysts say.
“Should the next quarter be weaker than expected, there’s the chance that the BOJ will be called on to do some more easing - and how the BOJ responds then will be another point to watch,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.
Economics minister Akira Amari signalled the government’s readiness to compile an extra budget later this year should growth in the third-quarter stay weak, although any fiscal stimulus would probably not be big enough to have a major impact on the economy, given Japan’s dire government finances.
“At the moment I don’t feel the need (to prepare an extra stimulus) but we will take necessary steps as appropriate depending on economic developments from now on. Appropriate steps mean every possible measure,” he told reporters after the data was published.
On a quarter-to-quarter basis, Japan’s economy shrank 1.7 per cent in the second quarter, less than a median forecast for a 1.8 per cent fall.
The second-quarter contraction was the biggest decline since the first quarter of 2011, when the devastating earthquake and tsunami in March disrupted factory production and chilled household spending.
Reuters
