Japan GDP Falls Most Since 2011 Quake on Sales Tax Hike

The Japanese economy shrank by an annualised 6.8% in the second quarter due to a sales tax increase in April - the largest contraction since the 2011 disastrous tsunami and earthquake.

Japan increased its sales tax from 5% to 8% in April in order to generate more revenues and address its huge public debt. As a result, goods became more expensive in the country and consumers have reduces their spending accordingly.

Japan's GDP drop was not as hefty as the 7.1% decrease predicted by some economists.

On a quarterly basis, Japan's economy contracted 1.7% after a 1.5% growth in the first quarter.

Private consumption, which contributes 60% of the GDP, declined 5% from the previous quarter.

Japan increased its sales tax from 5% to 8% in April in order to generate more revenues and address its huge public debt. As a result, goods became more expensive in the country and consumers started to reduce their spending.

The sales tx also hits Japan's industrial production which declined 3.3% on month in June.

In addition, June retail sales fell 0.6% year on year and household spending declined in recent months.

Ahead of the tax hike, businesses and individuals boosted their spending.

"Consumers had brought forward spending ahead of April's increase in the consumption tax," said Marcel Thieliant, Japan economist at Capital Economics.

Thieliant noted that the economy will rebound in the second half of the year.

"The collapse in economic activity last quarter was largely a result of the higher sales tax, and we still believe that the recovery will resume in the second half of the year," he said.

Nomura economist Tomo Kinoshita noted that private consumption would rebound in the third quarter by 1% sequentially lifting annualised real GDP growth 2.3 percentage points.

"Given current conditions in the US and other overseas economies, we expect real exports to return to growth in Jul-Sep. Meanwhile, companies still appear to be relatively upbeat on capital investment. We think the Japanese economy will continue to recover at a moderate pace," Kinoshita said.

The Japanese government had the same view about the economy.

"Looking at monthly data during April-June, sales of electronics goods and those at department stores are picking up after falling sharply in April," Economics Minister Akira Amari said in a statement.

"The job market is also improving steadily. Taking these into account, Japan's economy continues to recover moderately as a trend and the effect of the sales tax hike is subsiding."