Growth data raise questions for BoJ policy

Q2 GDP will renew calls for BOJ easing: JPMorgan

Japan's economy contracted in the April-to-June quarter, but managed to perform slightly better than expected, data released Monday showed.

Gross domestic product (GDP) for the quarter fell 1.6 percent on-year, compared with expectations for a 1.9 percent contraction from a Reuters poll. Compared with the previous quarter, GDP contracted 0.4 percent, slightly better than expectations for a 0.5 percent contraction from a Reuters poll.

The Japanese yen was little changed following the data, last seen at 124.32 against the U.S. dollar, compared with 124.31 before the data's release. The Nikkei 225 index opened up around 0.3 percent.

"It doesn't look particularly good. Exports are down; consumption is down," Andrew Freris, CEO at Ecognosis Advisory, told CNBC. "The interesting part is, of course, we are coming in to two years of quantitative easing in Japan," he noted. "Nothing is happening."

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Takeshi Minami, chief economist at Norinchukin Research Institute, told Reuters that the Bank of Japan (BoJ) would be forced to cut its growth projections for the fiscal year "sooner or later" but would most likely stand pat on policy in the coming months unless downward pressure on prices strengthened.

Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute agreed, according to Reuters.

"I don't think the BoJ will immediately ease policy further because of the GDP data, since the central bank has already factored in a negative figure. But if the economy in July-September turns out to be weak, there is a chance the BoJ will implement more easing."

External demand subtracted 0.3 percentage point from GDP growth, while domestic demand erased 0.1 percentage point.

"Spring wage increases have not boosted consumer spending as much as hoped," Moody's Analytics wrote in a note released Friday, prior to the data.

Akira Amari, Japan's economy minister, attributed the contraction to weak exports to the U.S. and China, Reuters reported.

While he said that the U.S. economy was recovering and he didn't see much reason to be worried on that front, he added that he was watching how China responded to its slowing economy, Reuters reported. He said Japan wasn't currently considering stimulus measures.

Hiroshi Higuchi | Getty Images

Japan's policymakers have struggled to kick start the economy after decades of deflation, with the Bank of Japan launching a massive easing program in 2013 as part of "Abenomics," Japanese Prime Minister Shinzo Abe's plan to return the country to growth.

But after a consumption tax hike to 8 percent from 5 percent in April of 2014, the economy got clobbered when consumers stopped spending, forcing the government to postpone a second sales tax initially due this October.

However, weather may have played a hand in the drop in household spending over the past quarter. Most of Japan experiences a rainy season in June, but while that's an annual occurrence, some reports said there were more rainy days than usual this year. Lower than usual temperatures may also have hurt clothing sales.

Amari also noted that a rise in food prices may be discouraging consumers from increasing spending, but he expects consumer spending to slowly improve as wages begin to rise.