Japanese Economic Update – 15 August 2014

Japanese economy posts steepest quarterly contraction since 2009; economy shrinks 1.7% in Q2

In line with official projections; the Japanese economy posted its steepest quarterly contraction since 2009 in Q2 of this year when output shrank by 1.7% QoQ (6.8% YoY). In addition to the sharp contraction during Q2, growth figures for the first quarter of this year were also revised downwards.

The sudden deceleration in economic momentum is widely believed to be the result of the sales tax increase from 5% to 8% in April of this year, which followed a period of increased activity as consumers and businesses brought forward large ticket purchases in order to avoid paying increased tax.

Given the severity of the contraction, it will be interesting to see whether Japanese policy makers are willing to reconsider the merits of their optimistic assessment of the economy at the next monetary policy meeting.

Our view remains that low exports, weaker business investment and a recovering yen will ultimately force the BOJ into a further round of easing later this year in order for it to safeguard the recovery.

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