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Japan's Q2 GDP revised up but pressure on Abe, BoJ remains

Japan's economy shrank less than expected in the second quarter, although capital expenditure fell more than originally forecast, revised data showed.

The data is expected to keep policymakers under pressure to do more to energize the fragile recovery.

Prime Minister Shinzo Abe on Tuesday won a rare second term as leader of the Liberal Democratic Party, and thus as premier. Ahead of the party poll he released a statement in which he pledged to keep the economy as his prime focus.

Analysts expect any rebound in July-September growth to be feeble as factory output unexpectedly fell in July and China's slowdown dampened prospects for a solid recovery in exports, Reuters reported.

The world's third-largest economy shrank an annualized 1.2 percent in April-June, less than the initial estimate of a 1.6 percent contraction, Cabinet Office data showed on Tuesday. The median market forecast was a revision to a 1.8 percent contraction.

Hiroshi Higuchi | Getty Images

Capital expenditure fell 0.9 percent from the previous quarter, more than a preliminary 0.1 percent drop, clouding the outlook for the world's third-largest economy.

But the weakness in capital spending was offset by gains in inventories, which contribute to economic growth. Inventory gains added 0.3 percentage point to growth, more than a preliminary 0.1 percent contribution, the data showed.

Japanese policymakers are clinging to the hope that companies will use the record profits they earned from a weak yen and lower energy costs to boost wages and investment, generating a positive cycle of rising income and higher spending.

Read MoreJapanese PM Abe wins rare second term

But a recent batch of soft data has cast doubt on such optimism and the Bank of Japan's (BoJ) argument that a steady recovery will help accelerate inflation to its 2 percent target by around September next year.

Marcel Thieliant, Japan Economist at Capital Economics, called the details of Tuesday's data "hardly reassuring."

"The Bank of Japan has been arguing that Q2's weakness was temporary, but the July data on exports and industrial production suggest that a rapid recovery this quarter is unlikely. We expect GDP to expand by 0.3 percent q/q in both Q3 and Q4, which would imply a below-consensus rise of 0.5 percent in 2015," Thieliant said.

"However, we believe that demand will pick up ahead of the sales tax hike scheduled for April 2017, and therefore predict growth to accelerate to 1.5 percent next year.

"The upshot is that price pressures are unlikely to strengthen as quickly as policymakers hope, so the chances of hitting the 2 percent inflation by next summer remain slim. We stick to our view that the BoJ will step up the pace of easing at its end-October meeting."