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 China's economic slowdown and its impact on its Asian neighbors has
also heightened the chance that any rebound in growth in
July-September will be modest, analysts say.
The gloomy data adds to signs that Japan's economy is at a
standstill and heightens pressure on policymakers to offer
additional monetary or fiscal stimulus later this year.
The contraction in gross domestic product (GDP) compared with a
median market forecast of a 1.9 percent fall and followed a revised
expansion of 4.5 percent in the first quarter, Cabinet Office data
showed on Monday.
"If weak private consumption persists, that would be a further blow
to Abe's administration, which is facing falling support rates ahead
of next year's Upper House election," said Hiromichi Shirakawa,
chief Japan economist at Credit Suisse.
"This could raise chances of additional fiscal stimulus."
Private consumption, which makes up roughly 60 percent of economic
activity, fell 0.8 percent from the previous quarter, double the
pace expected by analysts.
It was the first decline since April-June 2014, when a sales tax
hike hit consumption, as households spent less on air conditioners,
clothing and personal computers.
Overseas demand shaved 0.3 percentage point off growth as exports to
Asia and the United States slumped.
ONUS ON GOVT, NOT BOJ
The data looks likely to force the BOJ to cut its forecast of a 1.5
percent economic expansion for the current fiscal year when it
reviews its long-term projections in October.
But the weak consumption underscores a dilemma the central bank
faces that may discourage it to expand stimulus.
Economics Minister Akira Amari acknowledged that consumption may
have been hit by rising food prices, as the BOJ's easing weakened
the yen and pushed up import costs.
Aides close to Abe have signaled that additional monetary easing is
unwelcome as further yen falls will push up food costs further and
hurt consumption.
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That puts the onus of the government to underpin growth despite
diminishing returns. Japan's economy grew just 2 percent since Abe
took office in December 2012, even as he deployed fiscal stimulus
roughly equal to 3 percent of GDP.
"The effect of Abenomics hasn't expired, but the policy steps
haven't boosted wages enough to meet rising living costs," said
Yuichiro Nagai, an economist at Barclays Capital Japan.
"There's not much the BOJ can do, so there's a higher chance the
government may offer fiscal support if consumption fails to rebound
in July-September," he said.
Economics minister Amari told reporters the government didn't have
any plans as yet to craft a fresh stimulus package, and will instead
keep pressuring companies to direct their record profits at raising
wages and capital expenditure.
But weak Asian demand casts doubt on whether manufacturers can
continue to reap huge profits overseas.
Kobe Steel Ltd, Japan's No.3 steelmaker, last month cut its annual
sales forecast for the year to March 2016, blaming weak sales of
hydraulic excavators in China.
"We don't expect to see a recovery in infrastructure investments and
capital spending in China within a year or a year and a half," Kobe
Steel executive vice president Naoto Umehara told reporters at the
earnings announcement.
(Additional reporting by Stanley White, Kaori Kaneko and Yuka
Obayashi; Editing by Kim Coghill and Eric Meijer)
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