Japan's economy shrank an annualised 7.1 percent in April-June from the previous quarter, more than a preliminary estimate, underscoring concerns the hit from an April increase in the sales tax may have been bigger than expected.
The revised contraction was the biggest since January-March 2009, when the global financial crisis hit Japan's exports and factory output, keeping policymakers under pressure to expand fiscal and monetary stimulus should the economy fail to recover from the disruption of the April tax hike.
"Growth this year will be less than what policymakers are expecting. The BOJ will ease policy in April because inflation will be too low to meet its target," said Takuji Aida, chief economist at Societe Generale Securities.
The revision was largely due to a bigger than expected decrease in capital expenditure and a deeper decline in consumer spending, suggesting the economy could struggle to overcome the April sales tax increase.
GDP was revised down from a preliminary 6.8 percent drop, according to Cabinet Office data released on Monday, and was more than the median market forecast for a 7.0 percent decline in a Reuters poll of economists.
On a quarter-to-quarter basis, the economy shrank 1.8 percent in the second quarter, compared with a preliminary reading of a 1.7 percent contraction.
Separate data showed the current account swung back into surplus in July, reflecting higher earnings on overseas investments.
The surplus stood at 416.7 billion yen ($3.96 billion), compared with economists' forecast for 444.2 billion yen. That followed a shortfall of 399.1 billion yen in June, which marked the first deficit in five months.
Policymakers had predicted the economy would shrink in the April-June quarter as consumers withheld spending after a shopping spree ahead of the sales tax hike to 8 percent from 5 percent on April 1.
But a recent run of weak data, including a slump in household spending and tepid output growth in July, has cast doubt on the policymakers' forecast that the economy will rebound steadily in the current quarter to sustain a moderate recovery.
The pace of growth from July will be crucial to Prime Minister Shinzo Abe's decision, expected by year-end, on whether to proceed with a scheduled second increase in the sales tax to 10 percent in October next year.
Exports were starting to recover, so as long as the economy expands in July-September Abe is likely to go ahead with the second sales tax increase, Societe Generale's Aida said, but added the government is likely to launch a fiscal stimulus package to soften the tax hike's impact.
If the economic recovery falters, it will also heighten pressure on the BOJ to expand the already massive monetary stimulus that it deployed in April last year to raise the economy out of deflation and reach a 2 percent inflation target.
The BOJ, which kept monetary policy steady on Thursday, remains unfazed so far by the soft data, arguing that the tax hike-pain is temporary with household spending set to pick up as a tightening job market pushes up wages.
BOJ Governor Haruhiko Kuroda has also expressed confidence the central bank can meet its inflation target sometime in fiscal 2015, but many private-sector economists say it will take longer.
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