Weak domestic consumption and slow exports weighed on the world’s third largest economy, which shrank an annualised 1.6%, after posting growth in the previous two quarters, according to the cabinet office.
However, the country’s main Nikkei stock market index was up strongly by 0.6% as investors expected the government to unleash more monetary stimulus.
“Should growth remain sluggish for another quarter and inflation expectations start to fall, the odds of additional monetary easing would increase substantially,” analysts at DBS said in a commentary.
Private consumption, which accounts for about 60% of Japan’s GDP, fell 0.8%, as exports dropped 4.4%.
“The sharp plunge from the previous quarter’s surprise growth was partly due to disappointing demand for Japanese products in the US, Chinese and other resource-exporting markets,” SMBC Nikko Securities said in a commentary.
“Sluggish wage growth and bad weather drove down consumption at home,” it added.
The downturn follows a stronger-than-expected expansion in the first quarter driven by a pickup in capital spending, but as more tepid second-quarter data rolled in some economists warned that the recovery would be short-lived.
An inventory buildup at Japanese firms was taking a toll on industrial production, analysts had warned.
Japan’s revised 1.1% expansion in January-March was sharply up from an initial estimate of 0.6% growth.
The figures had offered some good news for the prime minister, Shinzo Abe, and his two-year-old policy blitz, dubbed Abenomics, aimed at kickstarting anaemic growth and conquering years of deflation.
The programme called for big government spending, massive central bank monetary easing and reforms to a highly regulated economy.
But the pace of reforms, particularly shaking up a protected agricultural sector, has lagged.
Household spending has struggled to recover following a sales tax rise last year, as the Bank of Japan struggles to push up prices, partly weighed by tumbling oil prices.
The drop has forced BoJ chief Haruhiko Kuroda to push back a timeline for hitting a 2% inflation target – a cornerstone of Abenomics – although he insists that healthy price rises are around the corner.
Earlier this month, Kuroda said he would consider expanding the bank’s record 80 trillion yen ($640bn) annual asset-buying scheme – similar to the US Federal Reserve’s quantitative easing – if weak oil prices keep holding back near-zero inflation.
In July, Japan’s central bank cut its annual growth and inflation forecasts for the fiscal year to March 2016, but held off further monetary easing that many analysts expect will come later this year.
The BoJ now expects Japan’s economy to expand 1.7% in the fiscal year while inflation would come in at 0.7%. That was down from an earlier estimate of 2% and 0.8%, respectively.
Despite wage rises at some big firms and a tight labour market, convincing people to splash out on consumer goods has been a struggle after last year’s levy rise, aimed at helping pay down a massive national debt.
The higher taxes hammered consumer spending and pushed the economy into a brief recession. Japan limped out of the red in the last three months of 2014.
Despite a recovery in the US, the slowdown in China, a major market for Japanese exporters, has raised a red flag.
Following a month-long rout on Chinese stock markets, authorities devalued the yuan several times last week, roiling global equity markets and sparking fears of a currency war in which countries compete to boost exports by cutting the value of their currency.
( The Guardian)