GDP contraction revised to deeper than estimated 7.1%

AFP-JIJI, Bloomberg

The economy shrank more than estimated in the April-June quarter, revised data showed Monday, piling pressure on the Abe administration to delay another consumption tax hike and the Bank of Japan to expand its stimulus.

The figures will come as a blow to Prime Minister Shinzo Abe as his program aimed at rejuvenating growth struggles to gain traction.

Second-quarter gross domestic product shriveled 1.8 percent from the previous quarter, worse than the previously estimated fall of 1.7 percent, the Cabinet Office said.

The latest statistics confirmed the economy suffered its steepest quarterly drop since the 2011 quake, tsunami and nuclear crisis.

On an annualized basis, the GDP contraction was 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.

The blow from the first stage of the sales tax hike in April extended into this quarter, with retail sales and household spending falling in July. The administration signaled last week that it is prepared to boost stimulus to help weather a second stage of the levy scheduled for October 2015.

Corporate capital investment dropped 5.1 percent from the previous quarter, more than double the initial estimate of 2.5 percent.

Private consumption was meanwhile revised to a 5.1 percent drop from the initial reading of 5 percent, meaning it sank 19 percent on an annualized basis from the previous quarter, rather than the initial estimate of 18.7 percent, Monday’s report said.

The disappointing result was largely caused by the negative impact of the April 1 consumption tax hike, the first in 17 years, which was implemented to lift revenue and reduce the towering national debt.

Before that, the economy had been on the upswing as Abe’s deflation-fighting growth blitz, dubbed “Abenomics,” sharply weakened the yen, giving a lift to exporters and driving a stock market rally last year.

The BOJ’s unprecedented “quantitative and qualitative” easing campaign is the cornerstone of the program.

However, the initial enthusiasm that greeted Abenomics has faltered as the effect of the cheaper yen peters out and doubts grow over Abe’s willingness to press on with the structural reforms Japan needs.

Monday’s weak figures could force him to reassess the second stage of the tax hike planned for next year.

“Expectations will likely strengthen for further monetary easing by the Bank of Japan and more spending by the government,” said Junichi Makino, chief economist at SMBC Nikko Securities.

The BOJ is expected to act at its Oct. 31 policy meeting, while the administration is thought to be compiling an extra spending plan worth around ¥5 trillion as early as autumn, according to Dow Jones Newswires.

The administration and the BOJ maintain that the impact on the economy from the consumption tax hike to 8 percent from 5 percent has been minimal.

After a policy meeting last week, the BOJ decided against unveiling any new stimulus measures, with Gov. Haruhiko Kuroda sticking by his rosy view of the economy.

The administration is expected to decide by the end of the year whether to go ahead with raising the levy to 10 percent in October 2015.

The administration 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.

Research company Capital Economics said it expects a modest recovery in the second half of the year.

While the headline GDP figure was broadly in line with expectations, the details were rather discouraging, Capital Economics said, noting the sharp downward revision to corporate capital investment.

“Overall, we still expect the recovery to resume in the second half of the year. That said, output will probably rebound only modestly in the third quarter,” Capital Economics’ Japan economist Marcel Thieliant said in a note.

Credit Suisse argued the Japanese economy had three problems in the July-September quarter — slack personal spending, slow growth in factory output and dull foreign demand.

  • phu

    I have to wonder about whether this can be entirely or even largely attributed to the tax hike. I wouldn’t be surprised if it’s at least part of the reason, but frankly, it’s hard to take media reports of something as complex as a nation’s economy seriously — particularly when they seem to cite a single factor without even bothering to discuss other things that are clearly relevant.

    Considering Japan’s economy was already struggling for all sorts of pre-tax reasons, the worsening state of relations with their neighbors (which certainly have an impact on international trade and services), the general state of global economics and politics, and all the other things I’m not even aware of, it seems like a severe oversimplification to discuss this in just this one very limited context.

    • Chris Clancy

      Do you live here in Japan? I pressured my employer to relocate me back to my official place of residence because I could not afford to live two places at once. Still, I’ve been living off of my credit card to make ends meet since the already over-priced everything went up again in April.

  • Ken5745

    Abe has no experience in economics and will lead Japan to a full blown recession and another lost decade. Japan’s debt over GDP is already over 265%, highest amongst the developed nations. It’s all falling apart under Abe san.

  • Fee-fi-fo-fum

    How does growth translate in to prosperity?

  • Darkthoughts

    Don’t worry! Australia’s Tony Abbott is about to let the Japanese build all our subs for us. That’s $20 Billion, straight up! There’s plenty more where that came from. Now with our Free Trade Agreement the Japanese will probably have a pretty good shot at all our major infrastructure projects! That could be worth much, much, more. What Australian industry will do in response to this level of competition? WHO CARES! Ha, ha, ha, chuckle!

  • Darkthoughts

    Oh, sorry. I forgot to add now that Scott Morrison has reduced the English speaking requirements of the 457 working visas to Australia the Japanese who can’t find work in Japan can now be sponsored out to Australia through all the corporate links between the two countries. What will Australian workers do in face of this increased competition from imported labor that is already assured of a job before they can even come here (requirement of 457 visa.)? WHO CARES! Ha, ha, ha!….aw….

  • Doc Lemm

    Japan starting glow from all the radiation… It’s a nation killer…

  • George Reichel

    The first domino?

  • MooreGreen

    To talk about the Japan economy as something that can be fixed would be like saying a gazelle that has been half eating by a lion will
    walk again. Pretending that Fukushima dosent exist does not make it so.