2014.08.1303:59:45UTC+00Japanese GDP contraction comparable to 2011 low

A sharp drop in spending and investments have caused Japan’s economy to shrink by the largest margin since the 2011 earthquake.

Data from Japan’s Cabinet Office revealed that its gross domestic product (GDP) shrank by an annual rate of 6.8% during the second quarter to fall just short of a 7% contraction predicted by economists through a Bloomberg News survey. The decline is only 0.4% when price changes are not taken into account.

Economy Minister Akira Amari has said that the government is ready should there be a need to enact additional policies to uplift the struggles of its economy. Output fell the most in over three years in June with companies choosing to pare excess inventories to the dismay of Prime Minister Shinzo Abe who had been betting on a speedy recovery.

Chief economist Takeshi Minami in Tokyo’s Norinchukin Research Institute Co. says that, “The probability is high that the July-September quarter will see a rebound, but the fall in real incomes and weakness in production could weigh on the recovery.”

In the previous quarter, growth in Japan sped up with help from consumers and businesses making purchases prior to the enactment of a 3% sales tax hike in April. Household consumption has since then dropped by an annual rate of 19.2% compared to the first quarter alongside a 9.7% decline in private investments. Wage growth, however, has been minimal in the country putting pressure on consumers to tighten their budgets. Consumer prices increased by 3.6% in June compared to the previous year while prices of food gained by 5.1% due to the Bank of Japan encouraging inflation through its easing program.

Chief economist Yuuchi Kodama from Meiji Yasuda Life Insurance Co.  believes that, “Unless the economy posts zero growth or contracts in the third quarter, Abe may decide to raise the sales tax further.” A further 2% increase to the sales tax is being planned by Japanese officials in October 2015, but is still dependent on Abe’s assessment of whether the strength of the economy can weather the change.

Japan’s economy is predicted to expand by an annualized rate of 2.9% in the third quarter according to the results of a separate Bloomberg survey conducted earlier this month.