Japanese economy shrinks by 7.1%

Japan's economy contracted in the second quarter at the fastest pace since 2009, dealing a blow to Prime Minister Shinzo Abe's efforts to re-energize the economy with pro-growth steps.

Revised data released Monday showed that the country's gross domestic product contracted an annualized 7.1% in the April to June quarter from the previous three-month period as businesses as well as consumers retrenched after the government raised the sales tax. Preliminary figures showed a 6.8% decline.

While purchases of big-ticket items such as homes, cars and TVs soared in the run-up to the first sales tax rise in 17 years, they plummeted once the higher levy took effect on 1 April.

The revised data showed that second quarter consumption dropped 5.1% with business spending falling by the same percentage.

Even with the negative impact of the higher sales tax making a sharp fall in the GDP almost a foregone conclusion, analysts still expressed concern.

Private consumption makes up some 60% of Japan's economic activity. The nation's consumers were largely seen spending more in the first quarter rather than the second, however, in an attempt to beat the sales tax hike introduced in April.

And that activity is what economists say negatively impacted growth in the second quarter.

A raft of official data released at the end of last month by Japan's government showed that households had spent less and that factory output stayed flat in July.

Retail sales in July showed some small hope, rising by 0.5% from a year earlier, after a fall of 0.6% in June.

But economists say the current economic landscape should encourage the government to introduce even more reforms.

At the beginning of this month, Japan's prime minister Shinzo Abe announced a government re-shuffle, which many have said signals his determination to get the economy back on track by the end of the year.

Abe is expected to make a decision in December about a second hike to the sales tax, which would see it move to 10% in October next year.

Japan's economy minister Akira Amari said on Friday that the nation was ready to introduce a stimulus package that would buffer the impact of another sales tax hike if it was introduced.

He said the prime minister's position was "utterly neutral" on a further sales tax rise.