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Japan GDP shrinks 7.1%, fastest in over 5 years

Shinzo Abe

Bloomberg Tokyo
Japan's economy contracted the most in more than five years, highlighting the challenge for Prime Minister Shinzo Abe in steering the nation through the aftermath of a sales-tax increase.

Gross domestic product shrank an annualised 7.1 per cent in the three months through June, the most since the first quarter of 2009, the Cabinet Office said on Monday in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a seven per cent drop.

The blow from the sales-tax hike in April extended into this quarter, with retail sales and household spending falling in July. The government signaled last week that it was prepared to boost stimulus to help weather a further increase in the levy scheduled for October 2015.
 

"It's getting harder to predict if Abe can go ahead and raise the tax to 10 per cent," said Minoru Nogimori, an economist at Nomura Securities Co in Tokyo. "It won't be easy decision for Abe with the current economic situation."

The Topix index of shares rose 0.2 per cent at 10:17 a.m. while the yen advanced 0.1 per cent to 105.02 per dollar. Companies' capital investment dropped 5.1 per cent from the previous quarter, more than double the initial estimate for a 2.5 per cent decline. Private consumption was revised to a 5.1 per cent decline from an initial reading of a 5 per cent fall.

Falling investment
Honda Motor Co, Japan's No 3 automaker, plans to cut capital outlays 10 per cent this financial year, while NTT Docomo Inc, the nation's largest mobile-phone carrier by subscribers, forecasts spending will drop about 2 per cent. Capital expenditure growth by non-financial companies will slow on aggregate to 1.3 per cent next financial year from an estimate of 7.9 per cent this year, according to a Moody's Investors Service study of rated companies.

For the quarter, private inventory added 1.4 percentage points to GDP from the previous three months, more than the 1 per cent initially estimated.

Japan's surplus in its widest measure of trade narrowed 30.6 per cent from a year earlier in July, underlining headwinds to the economy. The 416.7 billion yen surplus in the current account was smaller than a median estimate of 444.2 billion yen in a survey of 27 economists by Bloomberg. The economic weakness followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose to 8 per cent from 5 per cent.

The government won't raise the tax again without taking steps to support the economy, Economy Minister Akira Amari said last week. A back-up plan for stimulus will be prepared, according to Finance Minister Taro Aso.

The size of additional fiscal stimulus may be about 2 trillion yen, Hiroaki Muto, an economist at Sumitomo Mitsui Asset Management Co.

Private consumption dropped an annualised 19 per cent from the previous quarter, compared with the initial estimate for a 18.7 per cent drop, the report showed.

Abe is striving to generate a sustained recovery after the central bank's record stimulus brought initial success in fighting off two decades of economic stagnation.

While he is counting on a quick rebound, the economy has struggled this quarter, with industrial production rising less than expected in July and August car sales dropping to a three-year low.

The government aims to raise the sales tax to 10 percent in October 2015. Abe will decide whether to proceed with the plan by the year-end, based on the strength of the economy.

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First Published: Sep 09 2014 | 12:10 AM IST

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