The Business Times

Japan's Q2 GDP shrinks 6.8% after tax hike

Govt officials insist recovery is on track and expect a turnaround in Q3

Published Wed, Aug 13, 2014 · 10:00 PM
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JAPAN'S economic recovery was thrown sharply into reverse in the second quarter of this year, as private consumption slumped in the wake of April's hike in the national consumption tax.

Real Gross Domestic Product (GDP) plunged 6.8 per cent at an annual rate, preliminary data published yesterday by the Cabinet Office indicated.

Although the contraction was the economy's worst since the devastating earthquake and tsunami of March 2011, it was still shy of the consensus forecast by economists of a more than 7 per cent drop.

The Tokyo stock market took a calm view of the situation. The Nikkei 225 stock average closed 0.3 per cent up on Tuesday's close at 15,213.00; the yen remained virtually unchanged against the dollar at around 102.

Japanese government officials insisted yesterday that the country's economic recovery was still on track.

The Ministry of Economy, Trade and Industry said after the release of the latest data that the sharp downturn in the April-to-June quarter was "within expectations" and that the outlook for Japan's economy was still "upbeat"; it also predicted that the GDP would grow "sharply" in the current (third) quarter.

Japanese finance ministry officials argued that underlying trends in personal consumption, "real" wages (that which is adjusted for inflation) and in corporate capital investment all augur well for a turnaround to happen in the third quarter and to continue beyond that.

Others were less sanguine. Koya Miyamae, a senior economist of SMBC Nikko Securities in Tokyo, for example, was quoted by Kyodo news service as having described the latest GDP data as "very bad".

Meanwhile, the country's prime minister Shinzo Abe pledged that his government would do everything in its power to ensure that the world's third largest economy returned to a growth path, prompting speculation of a possible supplementary budget to boost growth, and of possible further monetary easing by the Bank of Japan (BOJ).

There have been some dramatic swings in growth this year, obscuring the underlying trend in Japan's economy. GDP expanded by a 6.1 per cent annual basis for the first quarter of the year, as Japanese consumers engaged in some frenzied shopping ahead of the April 1 rise in consumption tax from 5 per cent to 8 per cent.

As growth is measured from quarter to quarter, analysts had expected the April-to-June figures to dip sharply after the first-quarter surge in output. As it turned out, it fell by 1.7 per cent compared with the first three months of the year (or by 6.8 per cent on an annual basis).

Consumer spending in Japan, the single largest component of GDP (around 60 per cent), went down 5 per cent in the April-to-June period from the first quarter, when consumption had risen 2 per cent. This was the sharpest drop since comparable data became available in 1994.

Meanwhile, housing investment slumped by just over 10 per cent in the second quarter, affected - like the sales of consumer durables - by the rise in the consumption tax.

Corporate capital investment fell 2.5 per cent.

The severity of the second quarter fall in the GDP could revive fears of a replay of 1997, when Japan's national sales tax was raised from 3 per cent to 5 per cent. The move had provoked a lasting slump in demand, analysts said, although the situation then was also influenced by the Asian financial crisis and a banking crisis in Japan.

Analysts say they expect the third-quarter GDP data to again to feature sharp swings, as the economy adjusts from the second-quarter downturn on its way back to more normal trends in the final quarter of calendar 2014.

The Cabinet Office had last month cut its forecast for real growth in GDP in the current fiscal year from 1.4 per cent to 1.2 per cent, acknowledging that the consumption tax hike, along with weaker exports, were weighing more heavily than expected on economic growth.

Further monetary easing by the BOJ is considered unlikely, even if weakness persists in the Japanese economy; a former Tokyo-based International Monetary Fund official told The Business Times that more monetary easing was unlikely unless the yen showed signs of strengthening significantly, which he said was also unlikely.

The International Monetary Fund (IMF) warned Japan recently that the country was in danger of becoming over-reliant on monetary policy to stimulate the economy.

At the same time, further fiscal expansion is considered risky in light of the government's outstanding debt burden, now at around 230 per cent of the GDP.

April's consumption tax hike has enlarged the government's coffers, though at the cost of an at-least-temporary drop in consumption. Economists say that Mr Abe will be very cautious about raising the sales tax again - to 10 per cent as planned in October next year - even though extra revenue is badly needed.

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