3 years after quake, GDP drop rattles Japan

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3 years after quake, GDP drop rattles Japan

Japan’s economy contracted the most since the record earthquake three years ago as consumption and investment plunged after an April 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. That was less than the median estimate of 37 economists surveyed for a 7 percent drop. Unadjusted for price changes, GDP declined 0.4 percent.

While Prime Minister Shinzo Abe is counting on a quick rebound, the economy struggled in June, with output falling the most since March 2011 as companies tried to pare inventories.

The government is ready to take flexible action if needed, Economy Minister Akira Amari said yesterday, as Abe weighs whether Japan can handle another bump in sales tax in 2015.

“The probability is high that the July-September quarter will see a rebound,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “But the fall in real incomes and weakness in production could weigh on the recovery.”

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.

Abe is striving to sustain a recovery after initial success in fighting off two decades of economic stagnation.

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 sales tax increase.

The higher tax hit consumers who have seen little growth in incomes and rising costs of living as the Bank of Japan stokes inflation with unprecedented easing. Consumer prices rose 3.6 percent in June from a year earlier - nine times the increase in total cash earnings - with food prices climbing 5.1 percent.

“The only apparent bright spot in today’s data was that net trade added to growth for the first time since the launch of Abenomics,” Marcel Thieliant, Singapore-based economist at Capital Economics wrote in a note. “Unfortunately, this was mostly due to a collapse in import volumes as a result of weaker domestic demand, while exports showed a renewed decline.”

Imports tumbled an annualized 20.5 percent while exports fell 1.8 percent. That’s sapping the manufacturing sector and shows the yen’s 16 percent drop against the dollar over Abe’s term has yet to drive outbound shipments.

The windfall in corporate profits that the weaker yen delivered to many Japanese manufacturers last year also shows signs of fading.

Bloomberg




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