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UPDATE 3-Japan suffers biggest economic slump since 2011 quake as tax hike bites
August 13, 2014 / 12:12 AM / in 3 years

UPDATE 3-Japan suffers biggest economic slump since 2011 quake as tax hike bites

* Q2 GDP falls annualised 6.8 pct vs f'cast -7.1 pct
    * BOJ seen unfazed, but weak data to keep it under pressure
    * Economics minister signals potential extra budget to support growth
    * Soft Q2 data to force BOJ into cutting rosy growth forecasts

 (Adds quotes, details)
    By Leika Kihara and Tetsushi Kajimoto
    TOKYO, Aug 13 (Reuters) - A sales tax hike last quarter drove Japan's
economy into its biggest contraction since the March 2011 earthquake and
tsunami, Cabinet Office data showed on Wednesday, keeping policymakers under
pressure to expand fiscal and monetary stimulus should recovery falter again.
    The April 1 sales tax hike took a heavy toll on household spending,
shrinking the world's third-largest economy by an annualised 6.8 percent from
April through June, and wiping out growth of 6.1 percent seen in January-March
as consumers went on a shopping spree to avoid the higher tax.
    The median market forecast was for a 7.1 percent drop.
    Seeing the slump as temporary, however, the Bank of Japan remains publicly
convinced the economy is on course for a moderate recovery and has no plans to
expand stimulus any time soon.
    The soft data, though, could compel the central bank into trimming its rosy
fiscal year economic projections when it reviews them in October.
    If third quarter growth proves weak the BOJ may also come under pressure to
add stimulus - particularly before Prime Minister Shinzo Abe decides later this
year whether to implement a second sales tax hike from 8 to 10 percent in
October next year, analysts say.
    "Should the next quarter be weaker than expected, there's the chance that
the BOJ will be called on to do some more easing - and how the BOJ responds then
will be another point to watch," said Yuichi Kodama, an economist at Meiji
Yasuda Life Insurance.
    Economics Minister Akira Amari signalled the government's readiness to
compile an extra budget later this year should growth in the third-quarter stay
weak, although any fiscal stimulus would probably not be big enough to have a
major impact on the economy, given Japan's dire government finances.
    "At the moment I don't feel the need (to prepare an extra stimulus) but we
will take necessary steps as appropriate depending on economic developments from
now on. Appropriate steps mean every possible measure," he told reporters after
the data was published.
    On a quarter-to-quarter basis, Japan's economy shrank 1.7 percent in the
second quarter, less than a median forecast for a 1.8 percent fall.
    The second-quarter contraction was the biggest decline since the first
quarter of 2011, when the devastating earthquake and tsunami in March disrupted
factory production and chilled household spending.
    Private consumption, which makes up about 60 percent of the economy, fell
5.0 percent in the quarter, more than the 4.3 percent drop forecast by markets.
Capital expenditure also slumped 2.5 percent, a worrying sign for policymakers
counting on companies to support recovery by increasing their spending.
    External demand added 1.1 percentage points to GDP, after shaving 0.2 point
off first-quarter growth, but was mostly due to a fall in imports. Exports fell
0.4 percent in the second quarter, underscoring how much the failure of exports
to rebound is weighing on the economy.
    Many analysts expect a pick-up in July-September as the tax hike impact
fades, with some projecting an annualised expansion of around 3 percent to 5
percent. A tightening job market is gradually pushing up wages and big firms
have boosted summer bonus payments, which augurs well for consumption.
    Still, a majority of economists project growth for the current fiscal year,
which began in April, to fall well short of last month's BOJ projection for a
1.0 percent expansion. 
    BOJ Governor Kuroda has repeatedly stated he would not be surprised to see a
contraction in April-June economic activity, and that there was no need to offer
additional stimulus as growth is set to rebound in July-September.
    Some analysts pointed to a rise in inventories in the second-quarter GDP
data as a sign that companies, having underestimated the tax hike effect, added
excess inventory and will scale back production in coming months.
    "The positive contribution from inventories is a risk factor for the future.
This means we need stronger domestic demand growth in July-September to achieve
a rebound strong enough to justify a second rise in the sales tax," said
Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch.
    "I think there is a 70 to 80 percent chance Abe will raise the sales tax
again with another fiscal stimulus package," he said.
    Government officials have already signalled privately that they are ready to
compile an extra budget toward the year-end to shore up the economy, scraping
leftover money from the previous fiscal year's budget.
    They remain silent on the possible size of the stimulus and when the budget
would be compiled, all of which depends on economic performance this quarter.
    Under its "quantitative and qualitative easing" policy put in place last
April, the BOJ now buys 70 percent of new government bonds issued in markets, as
well as risky assets, to reflate the moribund economy.

 (Additional reporting by Stanley White, Chris Gallagher and Minami Funakoshi;
Editing by Eric Meijer)

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