August 13, 2014 1:00 pm JST

Japan GDP shrinks 6.8% after April sales tax hike

Economy Minister Akira Amari speaks at a news conference Wednesday.

TOKYO -- Japan's April sales tax hike has hit the economy hard last quarter. But the government is projecting a bounceback after summer.

     The Cabinet Office said in a preliminary report Wednesday that real gross domestic product for April-June contracted at an annualized rate of 6.8% from the previous quarter. The decline was steeper than in the same quarter of 1997, after sales tax was raised from 3% to 5%. At that time, the economy shrank 3.5%.

     Economic and Fiscal Policy Minister Akira Amari was unfazed by the big contraction. "The backlash will ease down the road," he said at a news conference after the GDP results were announced. He said the economy will return to a mild recovery path after summer.

     Personal spending dropped 5.0%. The quarter before, it registered a 2.0% increase as consumers flocked to stores before the introduction of the new tax rate. The consumption of home appliances and automobiles was particularly hard hit. Personal spending on durable goods plunged 18.9%.

     In the January-March period of 1997, personal spending rose 2.1%, but fell 3.5% in the following quarter.

     External demand did not grow either. Exports fell 0.4% in April-June, sliding into negative territory for the first time in three quarters.

     Exports grew 4.2% on the year in April-June of 1997, supporting the economy in place of shrinking consumption. "Production shifts to overseas are well underway," said Amari, indicating that the export decline this time is a long-term structural trend.

     The government and the Bank of Japan expect mild growth in external demand to lift the economy in fiscal 2014. But while the U.S. economy is recovering, Japan's sluggish exports could cast a pall over its economic outlook.

     Economists, however, doubt the Japanese economy will slip into a downward spiral. According to the Japan Center for Economic Research, 42 economists it surveyed forecast GDP will grow 4.08% in the July-September period.