Japan GDP forecast revised to 1.2% following 2Q GDP revelation

The sales tax hike really had impact.

Japan's 2014 GDP forecast has been revised to 1.2% from 1.4% by Nomura, following the official announcement of a big contraction in 2Q GDP.

According to a research note from DBS, it is now confirmed that the economy has been hit hard by the sales tax hike.

Private consumption growth contracted as much as -18.7% QoQ saar in the Apr-Jun period, fully reversing the gains in the past ten quarters.

The level of consumer spending has fallen back to that witnessed in end-2011, prior to the introduction of Abenomics.

Compared to the 1997 episode of sales tax hike, the disruption impact on consumption has proved to be more severe this time.

Here's more from DBS:

Exports had been expected to provide a cushion to the economy when domestic demand deteriorated.

But the facts were disappointing.

Exports of goods and services in the GDP accounts contracted -1.8% in 2Q.

A closer look shows that shipments to the US and China, where economic activity has rebounded in 2Q, also failed to improve.

Poor productivity, insufficient innovation and the continuation of industrial hollowing-out should have weighed on the competitiveness of Japanese exports.

Thanks to the accumulation of inventories and the downward correction in imports, the magnitude of 2Q GDP contraction was limited to -6.8%. If without the positive contributions of inventories and net exports, the 2Q GDP would have registered a double digit contraction.

Sluggish data should put more pressures on the policymakers.

Our updated GDP forecasts imply 0.5% growth in FY2014, significantly below the BOJ’s estimate of 1.0%.

The risks to our forecasts are still skewed to the downside as we have assumed a strong technical rebound for 3Q14.

Also note that the output gap has turned negative again in 2Q, which suggests that the underlying core inflation numbers will move downward in the later part of this year.

As such, we expect the BOJ to downgrade economic forecasts at October’s meeting before taking further policy actions in the year-end.