Japan's economy contracted by 6.8% in the second quarter, hobbled by an April sales-tax that curbed consumer spending and investments

It was the sharpest decline in Japan's gross domestic product since the country was battered by an earthquake and tsunami three years ago, according to a report on Bloomberg News.

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The three percentage point increase in sales-taxes was clearly reflected in household spending and investments as these plummeted by 19.2% and 9.7%, respectively, from the first quarter.

Ironically, the same sales-tax boosted Japan's economy to a 6.1% expansion in the first quarter, as households and companies rushed to buy goods to avoid higher prices when the levy takes effect.

The sales-tax further adds to the challenges of Japanese consumers, who are also facing inflation pressures from Bank of Japan's easing measures. Despite these concerns, consumers remain upbeat.

Data released by the government on Monday showed that consumer confidence increased for the third straight month in June, the Wall Street Journal reported.

Prime Minister Shinzo Abe and Economy Minister Akira Amari gave assurances that the economic decline will not last long. 

Amari, in particular, remains confident the economy will bounce and maintained the growth outlook of the government. He also hinted at possible measures to help the economy, saying that the government "ready to take flexible action if needed."

However, market watchers said there is a risk that it might be prolonged.

"The next focal point is how much the economy will rebound in the July-September period. If the upward pressure is weak, it will likely increase the chance that Prime Minister Abe decides in December to delay the next sales-tax hike," said Yasunari Ueno, chief market economist at Mizuho Securities, in a report on the Wall Street Journal.

In April, Japan raised its sales-tax to 8% from 5%, the first in 17 years. The measure is meant to raise much needed revenues to fund its social welfare programs particularly those for its greying population.

Abe had planned to further raise the tax to 10% in October, but analysts believe the prime minister and his economic team might reconsider the action if the economy continues to sag.

TagsJapan Economy, Prime Minister Shinzo Abe