News Analysis: Japan's economy shrinks in Q2 bringing "Abenomics" miracle cure into question

Japan's economy shrinking at an annualized pace of 1.6 percent in the April-June quarter as consumption dropped and exports weighed, has put renewed pressure on the government of Prime Minister Shinzo Abe to turn economic policy into fiscal realities and for the Bank of Japan (BOJ) to decide how it intends to continue to underpin the economy.

Following the latest GDP data being released earlier Monday, economists here were quick to point out that as well as the latest figure coming in below median analysts' forecasts and translating to a 0.4 percent fall from the previous quarter on an inflation- adjusted basis, it also marked the first contraction in three quarters for the world's third-largest economy.

A slowdown in Asian markets has also taken its toll, leading economists here said, but slumping domestic consumption and falling output as demand drops where the mainstays leading to the contraction they said, adding that Japan has yet to fully recover from last year's 3 percent tax hike from 5 to 8 percent in April, as Abe's aggressive "Abenomics" blend of economic policies has yet to fire on all cylinders.

Analysts said that the slumping GDP data was bad timing for Abe and his administration, who are experiencing an all-time low support rate from the public, hovering at around 30 percent, after ramming unconstitutional war bills through parliament recently without a public mandate, which could in theory allow the country to remilitarize and deploy troops borderlessly across the globe.

It has been a double-whammy for the unpopular prime minister who also lost favor after giving a globally-watched speech on the anniversary of the end of WWII, in which he failed to concretely apologize for Japan's war time atrocities and semantically side- stepped key language that was adopted and globally-accepted by former administrations.

"If weak private consumption persists, that would be a further blow to 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, adding that, " This could raise chances of additional fiscal stimulus."

Consumer spending, which makes up about 60 percent of Japan's GDP, declined 0.8 percent from the previous quarter, the cabinet office figures showed, with sales of seasonal products, such as air conditioners, being sluggish in the recording period, contributing to a bleak overall picture of the nation's consumption. Smartphones and apparel also took a hit, the latest government figures showed as households continued to tighten their belts in the wake of the tax hike and over fears that "Abenomics" may not be the economic miracle "cure all" it was first pitched as being.

Compounding a lack of spending, economists here pointed out that prior to the figures being released, Moody's Analytics had already said that, "Spring wage increases have not boosted consumer spending as much as hoped."

As for the central bank's moves, Takeshi Minami, chief economist at Norinchukin Research Institute, said the BOJ will now have to revise its growth projections for the fiscal year, but would likely not overhaul its key policy in the coming months.

Other analysts concurred, with Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute saying: "I don't think the BOJ will immediately ease policy further because of the GDP data, since the central bank has already factored in a negative figure. But if the economy in July-September turns out to be weak, there is a chance the BOJ will implement more easing."

According to Economic Revitalization Minister Akira Amari, temporary issues like a slowdown in neighboring economies and slowing exports, were having a negative impact on the economy here.

"The negative figure was greatly influenced by temporary factors, such as lower exports to China and the United States, as well as the effects of poor weather," Amari told a press conference after the data was released Monday.

Notably, the data showed that exports had dropped by 4.4 percent, from a 1.6 percent growth booked in the January-March quarter and marking the first negative slide in six quarters. While a slowdown in deliveries to China of Japan-made smartphones took its toll, the government also said that semiconductors and other manufacturing equipment was also not being shipped at previous rates, with this being compounded by slumping exports of steel products to the United States too. Endi