Japan’s economy probably shrank for the first time in nearly two years during the April-June quarter, dragged down by weaker-than-expected consumer spending after a sales tax hike and disappointing factory output.

Japan’s economy probably shrank for the first time in nearly two years during the April-June quarter, dragged down by weaker-than-expected consumer spending after a sales tax hike and disappointing factory output, a Reuters poll showed.

Exports, a main driver in the economy, also remained sluggish due to weak demand from emerging nations.

Gross domestic product data due to be released on August 13 is expected to show the economy shrank at an annualised 7.1% in the second quarter, according to the median forecast in a Reuters poll of 25 economists.

It would be the first contraction since July-September in 2012. The economy grew an annualised 6.7% in the first quarter thanks to an unexpected surge in capital spending and strong consumer spending before the sales tax increase.

The severity of the contraction could raise pressure on the Bank of Japan to ease policy further and would complicate prospects for a planned second hike in the sales tax in 2015.

“Economic data for June as a whole was weak. We had already known consumption was weak in April and May, but capital spending was also feeble and the export recovery was dull,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

But Miyazaki doubted whether the BoJ would be rushed into any fresh easing, unless there was a significant deterioration in the output gap, measuring the difference between actual and potential GDP.  On a quarter-to-quarter basis, Japan’s economy was forecast to have contracted 1.8% in the second quarter after 1.6% growth in the first quarter.

Yesterday, Bank of Japan Governor Haruhiko Kuroda defended the central bank for maintaining an upbeat economic view despite recent soft data.

Kuroda, however, reiterated his readiness to expand the BoJ’s stimulus if inflation faltered on the path to the 2% target rate.  He has repeatedly voiced confidence that Japan can achieve that target during the next fiscal year beginning in April 2015.

According to the poll, private consumption, which makes up about 60% of the economy, was likely to have dropped 4.3% in the second quarter as consumers reined in spending after going on a shopping spree before the tax hike.

That would be the first fall since July-September in 2012 and bigger than the fall seen when Japan last raised its sales tax in the second quarter of 1997.  Capital spending – which has been a weak spot – is expected to have declined 3.1% after a 7.6% gain in the first quarter.

 

 

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