Tokyo, Japan: Japan's economy contracted last quarter, official data showed Monday, boosting speculation the central bank will be forced to unleash more stimulus as Tokyo's ‘Abenomics’ growth blitz stumbles.

The world's third-largest economy shrank 0.4 percent in the three months to June -- or 1.6 percent on a yearly basis -- due to weak consumer spending at home and slowing exports, after two consecutive quarters of expansion.

Still, the figures published by the Cabinet Office came in slightly better than market expectations for a fall of 0.5 percent, or a 1.8 percent annualised drop.  

Private consumption, which accounts for about 60 percent of Japan's GDP, fell 0.8 percent from the previous quarter while exports dropped 4.4 percent.

‘The sharp plunge from the previous quarter's surprise growth was partly due to disappointing demand for Japanese products in the US, Chinese and other’ markets, SMBC Nikko Securities said in a commentary.

‘Sluggish wage growth and bad weather drove down consumption at home,’ it added.

The downturn follows stronger-than-expected growth in the first quarter driven by a pickup in capital spending, with Japanese firms generally reporting upbeat profits.

Japan on Monday revised up its reading for the January-March period for the second time to a 1.1 percent expansion, sharply higher than an initial estimate of 0.6 percent growth.  

‘Corporate earnings are strong -- leading indicators show upward movement for both machinery and construction investment,’ said Credit Suisse economist Hiromichi Shirakawa.

But as more tepid second-quarter data started to roll in some economists had warned that Japan's recovery was going to be wobbly, with an inventory buildup taking a toll on factory output.

News of the slowdown comes more than two years after Prime Minister Shinzo Abe launched a policy blitz, dubbed Abenomics, to kickstart anaemic growth and conquer years of deflation.

The programme called for big government spending, massive Bank of Japan (BoJ) monetary easing and reforms to cut red tape in Japan's highly regulated economy -- reforms that have stalled, however.

- China slowdown –

Household spending has also been unsteady following a sales tax rise last year that saw consumers rush to stores before prices rose.

BoJ chief Haruhiko Kuroda has pushed back a timeline for hitting a 2.0 percent inflation target, a cornerstone of Abenomics, although he insists healthy price rises are around the corner.

Earlier this month, Kuroda said he would consider expanding the bank's record 80 trillion yen ($640 billion) annual asset-buying scheme -- a means to pump money into the economy similar to the US Federal Reserve's quantitative easing -- if weak oil prices keep holding back near-zero inflation.

‘The slump in output last quarter should be followed by a tepid recovery in the second half of the year,’ said Marcel Thieliant from Capital Economics.

‘We remain convinced that the Bank of Japan will announce more easing in October.’

In July, Japan's central bank cut its annual growth and inflation forecasts for the fiscal year to March 2016.  

The BoJ now expects Japan's economy to expand 1.7 percent in the fiscal year while inflation would come in at 0.7 percent. That was down from an earlier estimate of 2.0 percent and 0.8 percent, respectively.
Despite wage rises at some big firms and a tight labour market, convincing people to splash out on consumer goods has been a struggle since last year's levy rise. Tokyo hiked taxes to help pay down a massive national debt.

But the rise hammered consumer spending and pushed the economy into a brief recession, which only ended in the last three months of 2014.

Despite a recovery in the US, a slowdown in neighbouring China -- Asia's top economy and a major market for Japanese exporters -- has raised a red flag.

Chinese authorities devalued the yuan last week, sparking fears the economy is growing more slowly than thought and prompting speculation it could start a currency war in which countries compete to boost exports by cutting the value of their units.