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Japan's economy shrinks 1.7% in April-June, govt data shows

© AFP/File | Employees of Toyota Motor's subsidiary Toyota Motor Kyushu mount an engine into the body of a Lexus NX, on an assembly line at the Miyata Plant in Fukuoka Prefecture, on August 8, 2014Employees of Toyota Motor's subsidiary Toyota Motor Kyushu mount an engine into the body of a Lexus NX, on an assembly line at the Miyata Plant in Fukuoka Prefecture, on August 8, 2014

Japan's economy shrank by 1.7 percent in the three months to June, underscoring the impact of a sales tax hike as consumption and housing investment dropped sharply, government data showed Wednesday.

The contraction -- which translated into a 6.8 percent decline on an annualised basis -- was slightly better than expectations for a 1.9 percent drop.

The world's number-three economy had been on the upswing as Prime Minister Shinzo Abe's growth blitz, dubbed Abenomics, helped sharply weaken the yen, giving a lift to exporters' profitability and driving a stock market rally last year.

But economists warned that the strong growth would take a hit as Tokyo hiked the country's consumption tax to 8.0 percent from 5.0 percent -- the first levy hike in 17 years, which was seen as crucial to taming Japan's huge national debt.

"After the consumption tax hike, private spending, housing-related investment and corporate capital spending rapidly fell, leading to the bigger-than-expected fall," Credit Suisse said in a note before the figures were published.

"Contraction of private spending, triggered by the shock from the consumption tax hike, was profound."

Millions of shoppers flocked to shops in a last-minute buying binge before the increase on April 1, with demand falling off sharply after prices went up.

Wednesday's data were the first gross domestic product numbers released since the rise, and underscore the challenges that Tokyo faces in pressing on with its bid to kickstart an economy long plagued by deflation and laggard growth.