Japan's economy shrank more than estimated in April-June, revised data showed Monday, piling pressure on the government to delay another sales tax hike, while the central bank faces calls to expand its stimulus.
The figures will come as a blow to Prime Minister Shinzo Abe as his programme aimed at rejuvenating growth struggles to gain traction.
Second-quarter gross domestic product (GDP) shrivelled 1.8 percent from the previous three months, worse than the previously estimated fall of 1.7 percent, the Cabinet Office said.
The latest statistics confirmed the world's third largest economy had suffered its steepest quarterly drop since the 2011 quake and tsunami disaster.
On an annualised basis -- if the performance was replicated over a 12-month period -- GDP contracted 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.
The disappointing result was largely caused by the negative impact of April's sales tax hike, the first for 17 years, which was introduced to lift revenue and reduce the country's massive national debt.
Prior to that the economy had been on the upswing as Abe's growth blitz, dubbed Abenomics, helped sharply weaken the yen, giving a lift to exporters' profitability and driving a stock market rally last year.
A huge monetary easing campaign by the Bank of Japan (BoJ) was a cornerstone of the programme.
However, the initial enthusiasm that greeted Abenomics has given way as the effect of the cheaper yen has petered out while doubts have emerged over Abe's willingness to press on with the structural reforms Japan needs.
Monday's weak figures could force Tokyo to reassess a second tax increase planned for next year.
"Expectations will likely strengthen for further monetary easing by the Bank of Japan and more spending by the government," said Junichi Makino, SMBC Nikko Securities chief economist.
- Questions over second tax hike -
The BoJ is expected to act at its October 31 policy meeting, while the government is thought to be compiling an extra spending plan worth around five trillion yen ($48 billion) as early as autumn, he told Dow Jones Newswires.
The government and the BoJ have maintained the impact on the economy of the sales tax hike from 5.0 percent to 8.0 percent has been minimal.
After a policy meeting last week, the bank decided against unveiling any new stimulus measures, with governor Haruhiko Kuroda sticking by his rosy view of the economy.
The government is expected to decide by the end of the year whether it will go ahead with raising the tax rate to 10.0 percent in October 2015, as planned.
Capital Economics said it expects a modest recovery in the second half of the year.
While the headline GDP figure was broadly in line with expectations, the details were rather discouraging, Capital Economics said, noting corporate capital investment was revised from a fall of 2.5 percent to a 5.1 percent drop.
"Overall, we still expect the recovery to resume in the second half of the year. That said, output will probably rebound only modestly in the third quarter," Capital Economics' Japan economist Marcel Thieliant said in a note.
Credit Suisse argued the Japanese economy had three problems in the July-September quarter -- slack personal spending, slow growth in factory output and dull foreign demand.
Meanwhile, separate data from the finance ministry on Monday showed Japan's current account surplus for July fell 30.6 percent from a year earlier to 416.7 billion yen ($4.0 billion) with higher fuel imports.
Japan's imports of fossil fuel have remained high with the country's nuclear reactors all still offline more than three years after the Fukushima disaster.
But the July surplus reversed a June deficit of 399.1 billion yen.
"The current account surplus may widen further in coming months as domestic demand will probably remain sluggish," Capital Economics said in a note.