Japanese economic activity post the GST hike

• The rise in the consumption tax rate has had the expected impact on the economy. Spending was pulled into the pre-tax months and has fallen sharply since the rate rose from 5% to 8% on April 1st. Although Japanese firms have told the central bank that the consequences of the tax rise were much as expected, June quarter’s fall in consumer spending was substantial, exceeding growth reported in the two previous quarters.
• Although a government stimulus plan is supposed to help maintain post-tax demand, the economy’s ability to absorb a fall in consumption and keep growing has been set back by the weakness of world trade. Japan repeatedly tried to export its way out of previous bouts of soft domestic demand but this time sluggish demand for its goods across key Asian markets are putting a further brake on economic activity.
• Partial economic data shows broad-based weakness in recent months, spreading beyond areas normally affected by a downturn in consumption. Recent disappointing monthly data for exports and investment as well as softness in some recent manufacturing surveys suggest June quarter GDP could fall by around 1½%.
• Once the economy has digested the sales tax increase, modest growth should resume. The labour market had been picking up until recently with slowly rising employment, falling unemployment and more job vacancies. Despite Government efforts to boost wages, nominal wage measures remain quite flat and the pick-up in inflation is eroding both real wages and real household income. Nevertheless, the household income and employment situation is still fairly good by recent standards and profits remain high which should support a resumption in investment growth.
• We have revised our 2014 growth forecasts down to 1.3% (was 1.6%) while 2015 growth is still around 1.5%, above the IMF’s ½% assessment of Japan’s long-term potential growth.

For further analysis download the full report.

• Japanese Economic Update – August 2014 (PDF, 553KB)