The Japanese economy suffered its biggest contraction in three years as higher taxes hit consumer spending.
GDP shrunk by an annualised 6.8 per cent in Q2, just short of the 7 per cent contraction expected by economists.
On a quarterly basis GDP fell by 1.7 per cent, after a 1.5 per cent rise in GDP in the first three months of the year.
The ‘third arrow’ of Prime Minister Abe’s aggressive monetary policy campaign, known as Abenomics, is a raft of structural reforms including increased taxes.
Japan’s consumption tax was increased from 5 per cent to 8 per cent in April with the government admitting it might increase it to 10 per cent by 2015.
Despite aiming to stimulate spending and economic growth, the policy has shocked the Japanese GDP into its biggest contraction since the 2011 tsunami disaster.
Japan’s economy initially surged when Abenomics was first introduced – which included a combination of bullish forward guidance and aggressive quantitative easing – but economists have since been split on whether long-term structural reforms will take hold.
Hargreaves Lansdown senior analyst Laith Khalaf says: “The drop in GDP was fully anticipated, in fact consensus was for a slightly worse contraction, and so the Japanese market has shrugged the data off. Japan’s economic fortunes still hinge on the success of Abenomics, and in particular the third arrow of structural reforms which aim to change Japan’s labour market.
”The stock market doesn’t currently look particularly expensive compared to its own history and compared to other developed markets, which suggests investors buying Japan today are doing so at a reasonable valuation.”