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Policymakers under pressure to expand stimulus following contraction

Japan suffers biggest economic slump since 2011 quake as tax hike bites

Reuters

The consumption tax hike last quarter drove the economy into its biggest contraction since the March 2011 quake and tsunami, Cabinet Office data showed Wednesday, keeping policymakers under pressure to expand fiscal and monetary stimulus should recovery falter again.

The April 1 consumption tax rise took a heavy toll on household spending, shrinking the world’s third-largest economy by an annualized 6.8 percent 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 levy.

The median market forecast was for a 7.1 percent drop.

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 BOJ may also come under pressure to add stimulus, particularly before Prime Minister Shinzo Abe decides later this year whether to implement a second consumption tax hike from 8 percent to 10 percent next year.

“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 at Meiji Yasuda Life Insurance.

Economics minister Akira Amari signaled 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.

On a quarterly basis, the economy shrank 1.7 percent in the second quarter, less than a median forecast for a 1.8 percent fall. The second-quarter contraction was the biggest decline since the first quarter of 2011, when the earthquake and tsunami in March disrupted factory production and chilled household spending.