Japan's Economy Contracts Sharply

By Dow Jones Business News, August 12, 2014, 08:35:00 PM EDT

TOKYO--Japan's economy contracted sharply in the second quarter after a sales-tax increase in April sent household spending tumbling, which economists said could pressure the government to take additional stimulus measures.

Real gross domestic product, the total value of all goods and services produced in the economy, shrank 6.8% in the three months through June on an annualized basis from the prior quarter.

That was slightly less than a 7.1% contraction forecast by economists surveyed by The Wall Street Journal, but economists said a larger-than-expected drop in private consumption and a sharp increase in inventories raised concerns about the resilience of Japan's economic recovery.

A fallback in economic output was expected after the nation's sales tax rose to 8% from 5% on April 1. Prime Minister Shinzo Abe and other policy makers have said they expect the downturn to be short-lived.

If that forecast proves too rosy, the government might have to compile more economic-stimulus measures and reconsider plans to raise the sales tax further to 10% in October 2015, economists said.

Investors should watch out for a risk that the domestic economy stays sluggish for longer than expected, said Yasunari Ueno, chief market economist at Mizuho Securities.

"The next focal point is how much the economy will rebound in the July-September period. If the upward pressure is weak, it will likely increase the chance that Prime Minister Abe decides in December to delay the next sales-tax hike," Mr. Ueno said.

The economy expanded 6.1% in the first quarter, as households stocked up on big-ticket items such as washing machines before the sales tax rose.

Government officials were more sanguine about Wednesday's data. Economy Minister Akira Amari said the figure didn't change the government's outlook that the economy continues to improve steadily. He said the government would respond flexibly on the economy but added that he didn't currently see a need to compile an additional budget.

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Japan's Economy Contracts Sharply