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Japanese economic growth collapses in Q2 as sales tax bites

Japanese economic growth collapses in Q2 as sales tax bites

Japan's economy in the second quarter shrank by the highest amount since the earthquake and tsunami of March 2011 as the recently introduced sales tax hammered household spending.

The country's GDP contracted by 6.8% in Q2 -a marked contrast to the 6.1% rise seen in Q1 - which has been attributed to the sales rush before the tax came in and subsequent lull when it became law in April. Quarter-on-quarter, it represented a 1.7% fall.

Although the numbers sound severe, economists had predicted Japanese GDP would contract by 7.1% with the impact of the sales tax widely flagged.

The key decision for the Japanese government now will be whether or not to press ahead with the planned second rise in consumption tax in October.

'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,' said Capital Economics' Marcel Thiellant.

While he described the fall in non-residential housing investment, which unlike residential housing is not subject to the new consumption tax, as 'ominous', Thiellant said the bright spot in the Japanese data release was the fact that 'net trade added to growth for the first time since the launch of Abenomics'. However, the caveat to this apparent bright spot is that this was largely down to imports flagging due to reduced consumption, which is unlikely to win over the Japan bears.

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