Japan says economy contracted 7.1 percent in 2Q

TOKYO (AP) — Japan's economy contracted at a larger than earlier estimated annual rate of 7.1 percent in April-June, as companies and households slashed spending following a tax hike.

The revised data released Monday show business investment fell more than twice as much as estimated before, or 5.1 percent, while private residential spending sank 10.4 percent, in annual terms. The earlier estimate showed the economy contracting 6.8 percent.

The recovery of the world's third-largest economy has slowed following the increase in the sales tax to 8 percent from 5 percent on April 1.

"Theoretically, there should be no impact from the consumption tax increase on corporate spending or long-term corporate planning, but a large number of Japanese corporations seemed to see a large impact from the hike on final demand," said Junko Nishioka, an economist at RBS Japan Securities in Tokyo.

The economy grew at a seasonally adjusted annual rate of 6 percent in January-March. In quarterly terms, the economy contracted 1.8 percent in April-June from the previous quarter.

Prime Minister Shinzo Abe has championed an aggressive stimulus program aimed at ending chronic deflation that has discouraged corporate investment, dragging on growth. But a sustainable recovery will require strong corporate and private spending, since exports and public spending have so far done little to lift growth.

Business activity surged early in the year as consumers and businesses stepped up purchases to avoid paying more tax, and economists forecast a rebound in coming months.

"We are not that pessimistic for the future picture of the Japanese economy," Nishioka said, forecasting a "V-shaped recovery," supported to stronger wage growth.

Indicators so far point to a modest recovery at best.

Conditions remained weak in July, though, as real incomes fell 6.2 percent in July from a year earlier and household spending dropped.

"Industrial production was still 2 percent below the second quarter average in July, and we have yet to see a turnaround in capital spending," Marcel Thieliant of Capital Economics said in a commentary. He noted that a recovery in retail sales should help boost growth, despite the sharp drop in residential spending following the tax hike.

Abe faces a tough decision over whether to go ahead with a pledge to raise the sales tax by another 2 percentage points, to 10 percent in 2015. The tax hikes are needed to counter ballooning public debt, which now is more than twice the size of the economy.