Japan's Q2 GDP shrinks 1.6%, first slump since recession in 2014

This file picture taken on Dec 4, 2014 shows an assembly line for Japanese auto giant Toyota Motor's hybrid vehicle Prius at the company's plant in Toyota in Aichi prefecture, central Japan.
This file picture taken on Dec 4, 2014 shows an assembly line for Japanese auto giant Toyota Motor's hybrid vehicle Prius at the company's plant in Toyota in Aichi prefecture, central Japan.PHOTO: AFP

TOKYO (REUTERS) - Japan's economy shrank at an annualised pace of 1.6 per cent in April-June as exports slumped and consumers cut back on spending, a bad omen for Prime Minister Shinzo Abe's policy drive to lift the economy out of decades of deflation.

China's economic slowdown and its impact on its Asian neighbours have also heightened the chance that any rebound in growth in July-September will be modest, analysts say.

The gloomy data adds to signs that Japan's economy is at a standstill and may rekindle market expectations that the Bank of Japan will expand monetary stimulus later this year.

The contraction compared with a median market forecast of a 1.9 per cent fall and followed a revised expansion of 4.5 per cent in the first quarter, Cabinet Office data showed on Monday.

Private consumption, which makes up roughly 60 per cent of economic activity, fell 0.8 per cent in April-June from the previous quarter, double the pace expected by analysts.

It was the first decline since April-June 2014, when an increase in the sales tax hike hit consumption, as households spent less on air conditioners, clothing and personal computers, said a government official briefing reporters on the data.

Overseas demand shaved 0.3 percentage point off growth as exports to Asia and the United States slumped, the data showed.

Many analysts say weak second-quarter GDP data alone won't trigger an immediate monetary easing.

But economists have already sharply cut their growth forecasts for the current fiscal year and expect the BOJ to do so too when it reviews its long-term projections in October.

Japan's economy suffered a mild recession last year as consumption took a hit from a sales tax hike in April 2014. Growth rebounded this year, only to slow again as exports and consumption remained disappointingly weak.