Japan second-quarter GDP shrinks 7.1 percent, adds to doubt over inflation goal

Mon Sep 8, 2014 6:16am EDT
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By Leika Kihara

TOKYO (Reuters) - Japan's economy shrank an annualized 7.1 percent in April-June from the previous quarter, worse than a preliminary estimate, and adding to doubts over whether the central bank can achieve its target of 2 percent inflation early next year.

The contraction was the biggest since January-March 2009, when the global financial crisis hit Japan's exports and factory output, and some analysts now expect the economy to barely grow in the current fiscal year to March 2015.

The weak performance following a sales tax hike in April will keep the Bank of Japan and Prime Minister Shinzo Abe's government under pressure to expand fiscal and monetary stimulus in order to lead the economy out of a long deflationary phase.

"Growth this year will be less than what policymakers are expecting. The BOJ will ease policy in April because inflation will be too low to meet its target," said Takuji Aida, chief economist at Societe Generale Securities.

GDP was revised down from a preliminary 6.8 percent drop, according to Cabinet Office data released on Monday, and was more than the median market forecast for a 7.0 percent decline in a Reuters poll of economists.

The revision was largely due to a bigger than expected fall in capital expenditure and a deeper decline in consumer spending, suggesting the economy could struggle to overcome the April sales tax increase.

The weakness in capital expenditure casts doubt on the BOJ's expectations that companies, which saw revenues rise thanks to the stimulus policies undertaken so far, will boost investment and hiring.

The central bank has said consumer inflation will head toward its 2 percent target as long as the economy grows above its potential, considered around 0.5 percent. The latest data suggested that was in the balance, with several analysts expecting even more minimal growth.   Continued...

A woman rides a bicycle past outside a food store in Tokyo February 17, 2014.  REUTERS/Yuya Shino