MercoPress. South Atlantic News Agency

Japan's economy contracted 1.8% in second quarter; fall blamed on consumer sales tax

There are calls for PM Shinzo Abe to delay a further rise planned for next year, while the central bank has faced fresh demands to expand its stimulus program.

Japan's economy shrank 1.8% in the April-to-June period, worse than forecast and raising more questions about the government's economic policy. The official data confirmed that the world's third largest economy suffered its sharpest quarterly contraction since the 2011 earthquake disaster.

On an annualized basis it would mean gross domestic product (GDP) fell 7.1%. The fall was blamed in part on a consumer sales tax introduced in April, with another rise planned for 2015.

The release of Monday's revised official data follows publication of initial GDP estimates that put the second quarter contraction at 1.7%, with the annualized rate at 6.8%. In the first quarter of 2014, the economy grew by 1.5%.

The single biggest factor behind the contraction in the second quarter is thought to be a rise in the nation's sales tax in April, to 8% from 5%.

There are now calls for Prime Minister Shinzo Abe to delay a further rise planned for next year, while the central bank has faced fresh demands to expand its stimulus program.

Private consumption makes up some 60% of Japan's economic activity. Retail spending figures have showed that the country's consumers boosted spending the first quarter in an attempt to beat the sales tax hike in April. And that activity is what economists say negatively impacted growth in the second quarter.

A raft of official data released at the end of last month by Japan's government showed that households had spent less and that factory output stayed flat in July.

Retail sales in July showed some small hope, rising by 0.5% from a year earlier, after a fall of 0.6% in June. But economists say the current economic landscape should encourage the government to introduce even more reforms.

At the beginning of this month, Mr Abe announced a government re-shuffles, which many have said signals his determination to get the economy back on track by the end of the year.

Mr Abe is expected to make a decision in December about a second hike to the sales tax, which would see it move to 10% in October next year.

Japan's economy minister Akira Amari said that the nation was ready to introduce a stimulus package that would buffer the impact of another sales tax hike if it was introduced. He said the prime minister's position was “utterly neutral” on a further sales tax rise.

“Mr Abe said no countries have doubled the sales tax rate over a year and a half,” said Mr Amari. “I expect that he will make a considerably cautious decision”.