Slumping exports and weak consumer spending sent Japan's economy into reverse in the second quarter, joining the ranks of China and many Asian neighbours in experiencing a slowdown.
The 0.4 per cent contraction in growth in the three months to June 30 compared with the first quarter has fed speculation that the central bank will be forced to unleash stimulus measures as "Abenomics" fails to lift the economy out of decades of doldrums.
The downturn follows stronger-than-expected growth in the first quarter due to a pickup in capital spending, with Japanese firms generally reporting upbeat profits.
But yesterday's data by the Cabinet Office prompted economists to warn that Japan's recovery would be wobbly. "The drop in (the second quarter)... was much bigger than we had expected and suggests the underlying trend remains very weak," said HSBC economist Izumi Devalier. "Households remain cautious about spending amid rising inflation, especially for daily necessities like food."
Private consumption, which accounts for about 60 per cent of Japan's gross domestic product (GDP), fell 0.8 per cent from the first quarter while exports dropped 4.4 per cent. Consumers are struggling to cope with last year's sales-tax hike and wages that have not kept pace with rising living costs.
Second-quarter fall in GDP compared with the first three months of the year
Percentage of GDP that private consumption in Japan accounts for
Inflation target set for next summer by Bank of Japan
Premier Shinzo Abe has delivered unprecedented monetary easing and fiscal stimulus as part of Abenomics that helped push the stock index to an eight-year high this month, but this has not translated into a broader economic recovery.
The economic slowdown in China - Asia's top economy and a major market for Japanese exporters - has raised a red flag. The impact of the slowdown on its Asian neighbours has also heightened the chance that any rebound in Japan's growth in this quarter will be modest, analysts say. "Export weakness was a major driver of the slump in (second-quarter) real GDP growth," BMI Research analysts said in a note. "We continue to see the weak yen providing little respite to Japan's export picture amid a continued external slowdown and offshoring by the corporate sector."
The gloomy data adds to signs that Japan's economy is at a standstill and may rekindle market expectations that the Bank of Japan (BoJ) will expand monetary stimulus later this year. "It might be fiscal spending that does the heavy lifting this time around," Ms Devalier wrote.
But Economy Minister Akira Amari shot down speculation that the government was thinking about implementing a supplementary budget. He blamed the contraction on temporary factors like bad weather, which kept consumers at home. "Income conditions continue to improve as a trend so private consumption is expected to recover gradually," he said after the data release.
BoJ chief Haruhiko Kuroda has pushed back a timeline for hitting a 2 per cent inflation target, although he insists healthy price rises are around the corner. Some analysts believe the BoJ's aim of hitting the target by next summer is unrealistic. "Price pressures are unlikely to strengthen as quickly as policymakers hope," Capital Economics analyst Marcel Thieliant said. "We remain convinced that BoJ will announce more easing in October."