Japan`s economy shrinks after sales tax rise

Japan's economy contracted by an annualised 6.8% in the second quarter of the year, the biggest fall since 2011 when it was devastated by an earthquake and tsunami.

The official gross domestic product (GDP) figure though was smaller than the 7.1% drop economists expected. The shrinkage was largely in response to a government sales tax, which held back consumer spending. Japan's sales tax rose from 5% to 8% in April. On a quarterly basis, the economy contracted 1.7% in the second quarter after a 1.5% rise in the first three months.

Rebound ahead

Private consumption, which makes up 60% of economic activity, was 5% down on the previous quarter.

The economy grew at an annualised rate of 6.1% in the first quarter of this year.

Recent retail sales and factory output figures both indicated a negative impact from the sales tax rise.

Marcel Thieliant, Japan economist at Capital Economics, said a rebound was expected in the coming months: "The collapse in economic activity last quarter was largely a result of the higher sales tax, and we still believe that the recovery will resume in the second half of the year.

"Consumers had brought forward spending ahead of April's increase in the consumption tax."

The Japanese government appears confident that its economy, the world's third largest, will pick up the pace later in the year.

In a statement issued after the GDP release, Economics Minister Akira Amari said: "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."

(Source: Bloomberg)