Japan Economy Contracts More Than Initial Estimate on Tax

Japan’s economy contracted the most in more than five years, highlighting the challenge for Prime Minister Shinzo Abe in steering the nation through the aftermath of a sales-tax increase.

Gross domestic product shrank an annualized 7.1 percent in the three months through June, the most since the first quarter of 2009, the Cabinet Office said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a 7 percent drop.

The blow from the sales-tax hike in April extended into this quarter, with retail sales and household spending falling in July. The government signaled last week that it is prepared to boost stimulus to help weather a further increase in the levy scheduled for October 2015.

“It’s getting harder to predict if Abe can go ahead and raise the tax to 10 percent,” said Minoru Nogimori, an economist at Nomura Securities Co. in Tokyo. “It won’t be easy decision for Abe with the current economic situation.”

The Topix index of shares rose 0.2 percent at 10:17 a.m. while the yen advanced 0.1 percent to 105.02 per dollar.

Companies’ capital investment dropped 5.1 percent from the previous quarter, more than double the initial estimate for a 2.5 percent decline. Private consumption was revised to a 5.1 percent decline from an initial reading of a 5 percent fall.

Falling Investment

Honda Motor Co. Japan’s No. 3 automaker, plans to cut capital outlays 10 percent this fiscal year, while NTT Docomo Inc., the nation’s largest mobile-phone carrier by subscribers, forecasts spending will drop about 2 percent. Capital expenditure growth by non-financial companies will slow on aggregate to 1.3 percent next fiscal year from an estimate of 7.9 percent this year, according to a Moody’s Investors Service study of rated companies.

For the quarter, private inventory added 1.4 percentage points to GDP from the previous three months, more than the 1 percent initially estimated.

Japan’s surplus in its widest measure of trade narrowed 30.6 percent from a year earlier in July, underlining headwinds to the economy. The 416.7 billion yen surplus in the current account was smaller than a median estimate of 444.2 billion yen in a survey of 27 economists by Bloomberg.

The economic weakness followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose to 8 percent from 5 percent.

Possible Stimulus

The government won’t raise the tax again without taking steps to support the economy, Economy Minister Akira Amari said last week. A back-up plan for stimulus will be prepared, according to Finance Minister Taro Aso.

The size of additional fiscal stimulus may be about 2 trillion yen, Hiroaki Muto, an economist at Sumitomo Mitsui Asset Management Co.

Private consumption dropped an annualized 19 percent from the previous quarter, compared with the initial estimate for a 18.7 percent drop, today’s report showed.

Abe is striving to generate a sustained recovery after the central bank’s record stimulus brought initial success in fighting off two decades of economic stagnation.

While he is counting on a quick rebound, the economy has struggled this quarter, with industrial production rising less than expected in July and August car sales dropping to a three-year low.

The government aims to raise the sales tax to 10 percent in October 2015. Abe will decide whether to proceed with the plan by the year-end, based on the strength of the economy.

The economy is forecast to grow an annualized 2.7 percent in the third quarter, according to a separate Bloomberg survey conducted in August.

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