Japan's economy has shrunk at its fastest pace in 13 quarters in April-June, contracting 1.7% (or at an annual rate of 6.8%), caused by the increase in the consumption tax to 8% from 5% in April.
The April 1 decision to raise the consumption tax was based on the government’s rising concerns over rising public debt in Japan, the world's third largest economy.
Moody's Investors Services says that while the collapse in GDP growth complicates the government’s proposed increase in the consumption tax to 10% by October 2015, it is not a fatal blow to Abenomics, Prime Minister Shinzo Abe’s effort to revitalize Japan’s economy.
The overall objectives of Abenomics are to end deflation and revitalize the economy, thereby reducing government deficits and debt.
"The silver lining in the gloomy second-quarter GDP numbers was that Japan’s GDP deflator, a broad measure of inflation, was up by 2% over a year ago, the first increase since third-quarter 2009 and the largest increase since 1992," says Moody's.
Moody's note that in quarter-over-quarter comparisons, the GDP deflator has risen for three consecutive quarters.
Year-over-year headline and core consumer price index (CPI) inflation have also been in positive territory since last year as the Bank of Japan aims to achieve its price stability target of 2% CPI inflation.
The decline in investment was not as severe. Private non-residential investment fell by 2.5%, but it followed strong first-quarter growth of 7.7%. As a result, private non-residential investment was still up by 7.1% in the second quarter, compared with a year earlier.
The collapse in Japan's GDP has led private think tanks to cut their estimates for Japan’s GDP for fiscal 2014.
Japan’s price-adjusted real GDP will grow only 0.5 percent in the year ending next March, the 11 think tanks say, compared with the 1.2 percent projected by the government and 1.0 percent by the Bank of Japan, reports the Japan Times.