(Bloomberg)—Japan’s economy contracted the most since the record earthquake three years ago as consumption and investment plunged after a sales-tax increase aimed at curbing the world’s biggest debt burden.
Gross domestic product shrank an annualized 6.8 percent in the three months through June, the Cabinet Office said Wednesday. That was less than the median estimate of 37 economists surveyed by Bloomberg News for a 7 percent drop. Unadjusted for price changes, the economy decreased at an annualized pace of 0.4 percent.
The downturn challenges Prime Minister Shinzo Abe’s effort to reflate the world’s third-biggest economy as he bolsters public finances with the first sales-tax hike since 1997. A weak rebound this quarter would increase pressure for extra stimulus as Abe weighs whether Japan can bear another bump in the levy in 2015.
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“Japan’s economy will rebound in the third quarter, but the pace is likely to be sluggish as there’s no driving force, with the recovery in exports and consumption looking slow,” Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, said before the report. “The government may introduce a spending package with the next increase in the levy to ease any concern over the economic outlook.”
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The contraction followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose in April. Abe’s striving to sustain a recovery after initial success in fighting off two decades of economic stagnation.
The yen was little changed at 102.27 per dollar at 9:01 a.m. in Tokyo. The Topix index of shares fell 0.3 percent.
Household consumption plummeted at an annualized pace of 19.2 percent from the previous quarter, while private investment sank 9.7 percent, highlighting the damage to demand by the 3 percentage point increase in the levy.
While Abe is counting on a quick return to growth, recent data indicated the economy was still struggling in June to shake off the higher levy: production fell the most since March 2011 as companies tried to pare elevated inventories and retail sales dropped more than forecast.