Japan economy's contraction a blow for 'Abenomics'

Japan's economy contracted 0.4 percent in the April-June quarter, official data showed Monday, underscoring how Tokyo's "Abenomics" growth programme has yet to gain traction.

Weak domestic consumption and slow exports weighed on the world's third largest economy, which shrank an annualised 1.6 percent, after posting growth in the previous two quarters, according to the Cabinet Office.

Still, the data came in slightly better than the market's expectations for a fall of 0.5 percent, or a 1.8 percent annualised drop.

Private consumption, which accounts for about 60 percent of Japan's GDP, fell 0.8 percent, as exports dropped 4.4 percent.

"The sharp plunge from the previous quarter's surprise growth was partly due to disappointing demand for Japanese products in the US, Chinese and other resource-exporting markets," SMBC Nikko Securities said in a commentary.

"Sluggish wage growth and bad weather drove down consumption at home," it added.

The downturn follows a stronger-than-expected expansion in the first quarter driven by a pickup in capital spending, but as more tepid second-quarter data rolled in some economists warned that the recovery would be short-lived. An inventory buildup at Japanese firms was taking a toll on industrial production, analysts had warned.

Japan's revised 1.1 percent expansion in January-March was sharply up from an initial estimate of 0.6 percent growth.

The upbeat data had offered some good news for Prime Minister Shinzo Abe's more than two-year-old policy blitz, dubbed Abenomics, aimed at kickstarting anaemic growth and conquering years of deflation.

The programme called for big government spending, massive central bank monetary easing and reforms to a highly regulated economy. The pace of reforms, particularly shaking up a protected agricultural sector, has lagged, however.

Household spending has struggled to recover following a sales tax rise last year, as the Bank of Japan struggles to push up prices, partly weighed by tumbling oil prices.

The drop has forced BoJ chief Haruhiko Kuroda to push back a timeline for hitting a 2.0 percent inflation target -- a cornerstone of Abenomics -- although he insists that healthy price rises are around the corner.