Japan's economy is expected to have lost all the ground it gained earlier this year during the second quarter as the April consumption tax hike appears to have thrown the fragile recovery off its tracks.
Asia's second-largest economy, which is set to release gross domestic product (GDP) data on Wednesday, shrunk an annualized 7.1 percent in the April to June quarter, according to a Reuters poll, down sharply from a 6.7 percent gain in the previous three months.
"The consumption tax hike that started in April will have a broad-based impact on demand components with consumption, residential investment and capex [capital expenditure] in particular expected to decline sharply," Yoshiro Sato, economist at Credit Agricole wrote in a note.
"That said, it is inevitable given the tax hike that the economy will contract following the robust growth thanks to the front-loaded increase in demand," he said.
In April, Japan raised its consumption tax to 8 percent from 5 percent, the first increase in 17 years, as part of efforts to rein in mounting public debt. When Japan last lifted the sales tax to 5 percent from 3 percent in 1997, the economy fell into recession not too long afterwards.
A raft of disappointing economic data in recent weeks has raised concerns that the April sales tax hike could prove more damaging than initially thought. Industrial output, for example, fell 3.3 percent on month in June - the fastest rate since the devastating earthquake and tsunami in March 2011 as companies scaled back production to offset a build-up in inventories.
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This has weighed on the country's benchmark Nikkei 225 index, which broke below the key 15,000 level on Friday as overseas investors grew increasingly cautious about the outlook for the economy.