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Update: Tepid Japan GDP stirs central bank easing speculation

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Japan's economy shrank less than initially thought last quarter, revised data showed Tuesday, but the still-disappointing figures rekindled speculation over more central bank stimulus aimed at propping up Tokyo's faltering "Abenomics" growth blitz.

[TOKYO] Japan's economy shrank less than initially thought last quarter, revised data showed Tuesday, but the still-disappointing figures rekindled speculation over more central bank stimulus aimed at propping up Tokyo's faltering "Abenomics" growth blitz.

The Cabinet Office said the world's number three economy contracted by 0.3 per cent in the April-June quarter, slightly less than an initial estimate of a 0.4 per cent contraction - and beating market expectations of a 0.5 per cent decline.

But economists warned over an inventory buildup at firms across the nation and pointed to a decline in capital spending, stirring concerns about Japan's prospects.

"The details were hardly reassuring," Marcel Thieliant from Capital Economics said in a commentary.

"The upward revision was mostly due to a larger contribution from stock building," he added.

The latest GDP number presents another challenge to Prime Minister Shinzo Abe, whose bid to kickstart the long-laggard economy has stumbled as he faces stiff public opposition over efforts to push through unpopular legislation aimed at expanding the role of the military.

However, Mr Abe - who swept to power in late 2012 - was on Tuesday re-elected as head of his ruling Liberal Democratic Party, after running unopposed.

Japan's economy has struggled amid chronically soft domestic demand, while a slowdown in China is also weighing on exports.

The slowdown comes more than two years after Mr Abe launched a policy blitz, dubbed "Abenomics", to kickstart anaemic growth and conquer years of deflation.

The programme called for big government spending, massive Bank of Japan (BoJ) monetary easing and reforms to cut red tape in Japan's highly regulated economy - reforms that have now stalled, however.

Household spending has also been unsteady following a sales tax rise last year, brought in to pay down a massive national debt, which saw consumers rush to stores before prices rose.

"The economic outlook will likely depend on a recovery in domestic demand, such as capital investment and household spending," said SMBC Nikko Securities.

"If household consumption fails to recover, it will raise the possibility of an extraordinary budget" to deal with the downturn.

Mr Thieliant predicted Japan's GDP would expand by 0.3 per cent in each of the next two quarters, "which would imply a below-consensus rise of 0.5 per cent in 2015".

Bank of Japan chief Haruhiko Kuroda has pushed back a timeline for hitting 2.0 per cent inflation, a cornerstone of Abenomics, although he insists healthy price rises are around the corner.

But Mr Kuroda has said he would consider expanding the bank's record 80 trillion yen (S$957.8 billion) annual asset-buying scheme - a means to pump money into the economy similar to the US Federal Reserve's quantitative easing - if weak oil prices keep holding back near-zero inflation.

"We stick to our view that the Bank of Japan will step up the pace of easing at its end-October meeting," Mr Thieliant said.

The downturn follows stronger-than-expected growth in the first quarter owing to a temporary pickup in capital spending, with Japanese firms generally reporting upbeat profits.

In the January-March period, Japan's economy expanded 1.1 per cent.

AFP