Japan’s economy contracts in Q2

<p>The government blamed weak exports and sluggish consumer spending for the drop in growth.</p>

Japan's economy shrank at an annualised pace of 1.6 per cent in the second quarter, following an expansion of 4.5 per cent in the first quarter, official data revealed.

Economics Minister Akira Amari blamed the GDP contraction on weak exports to China and the US, as well as poor consumer spending as a result of bad weather.

Japan's economy has been facing difficulties in recent years including stagnant wages, a decline in business investment, a fall in business spending and a drop in consumer spending due to a sales tax increase from five to eight per cent in April 2014.

Negative outlook

This latest GDP report follows a recent string of weak data including exports and factory output, which raised fears about the outlook for the country's economy. 

Private consumption fell 0.8 per cent from the previous quarter, despite forecasts of a 0.4 per cent decrease.

In addition, China's economic slowdown has heightened the chance that any rebound in growth in July-September will be modest, analysts quoted by Reuters said.

"If weak private consumption persists, that would be a further blow to Prime Minister Shinzo Abe's administration, which is facing falling support rates ahead of next year's Upper House election," said Hiromichi Shirakawa, chief Japan economist at Credit Suisse. "This could raise chances of additional fiscal stimulus."

Abenomics in question

The data is expected to put pressure on Shinzo Abe to revamp his "Abenomics", a programme that combines aggressive monetary expansion, fiscal stimulus and structural reforms designed to revive the economy and end years of stagnation. 

Takuji Aida, an economist at Societe Generale, told the Telegraph: "It will be necessary for the government to continue to support economic sentiment through policies until the real economy and inflation strengthens."

He added: "In the extraordinary Diet session to be held in the autumn, we expect economic measures will be implemented in order to accelerate the movement towards a complete exit from deflation. We also expect the BoJ to implement additional QQE measures, probably in October."

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