TOKYO • Japan's economy lurched towards a possible recession after taking another battering from a sales-tax hike in the last quarter that left the economy shrinking at the fastest pace in nearly six years - even before the coronavirus outbreak.

Japan's gross domestic product shrank at an annualised pace of 6.3 per cent from the previous quarter in the three months to last December, the biggest slide since a previous tax increase in 2014, according to a preliminary estimate by the Cabinet Office yesterday.

Economists surveyed had predicted a fall of 3.8 per cent, and the far-worse-than-expected outcome showed that some of the government's confidence in measures to cushion the blow of the tax hike was misplaced.

The result also raises the possibility that with the virus still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth little more than two months after his most recent stimulus package.

Ms Mari Iwashita, chief market economist at Daiwa Securities, said: "I'm getting ready for another contraction in Japan's first quarter. There just aren't any positive factors to build a positive growth forecast," flagging her view that the economy is likely falling into recession.

Ms Iwashita expects the government to form an extra budget once it becomes clear the economy has stayed in a funk in the first quarter.

The figures laid bare the vulnerability of domestic consumption to sales-tax hikes, said Credit Suisse Group economist Takashi Shiono.

The latest data showed private consumption plunged by an annualised 11 per cent in the quarter, as households slashed purchases of cars, cosmetics and domestic appliances. In 2014, the hit was 18 per cent.

Businesses also scaled back investment by 14 per cent. While the initial trade deal between the US and China should have offered a tailwind for investment this quarter, the unexpected virus outbreak may instead amplify caution in the boardrooms of Japan Inc.

The virus has already stopped the visits of hundreds of thousands of Chinese tourists to Japan at the beginning of Japan's Olympic year, hitting an important source of spending revenue.

The longer the outbreak disrupts production and domestic demand in Japan's biggest trading partner, the more likely Japan's exporters will suffer and parts supplies may dry up.

Government officials stuck to their line that the tax impact on the economy was smaller this time than in 2014, but hinted that more spending could be in the pipeline if a slump looked certain.

Economy Minister Yasutoshi Nishimura said in a statement: "We will keep paying careful attention to the virus' effect on tourism and the wider economy. According to the level of emergency, we will take necessary steps as needed in a flexible manner, and respond fully."

Mr Abe unveiled initial measures to counter the impact of the coronavirus last week, but so soon after releasing his economic package last December, he is likely to want to see harder evidence of a recession before mulling over another large spending spree. Speaking in Parliament yesterday, he said the government would keep a close watch on the economic impact of the sales tax and the virus.

While the Bank of Japan has flagged its concern over the virus, it is also likely to emphasise the need for more data to assess the underlying trend. Given the growing side effects of its massive easing programme and the relative stability of Japan's currency, economists see additional action by the bank in the near future as unlikely.

BLOOMBERG