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Japan: Japan's economy shrinks as tax rise hits spending

Wednesday, 13 August 2014   (0 Comments)
Posted by: Author: The Guardian
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Author: The Guardian

GDP fall is worst since tsunami disaster of 2011 as businesses and consumers try to offset sales tax rise

The Japanese economy shrank at an annual pace of 6.8% in the second quarter after spending was hit by a sales tax rise in April, government figures show.

Japan's GDP also contracted 1.7% during the April-June period from the previous quarter.

The decline was the worst since the March 2011 tsunami and earthquake in north-eastern Japan. In the first quarter of 2011, Japan's economy shrank at an annual rate of 6.9%.

The weak figures were expected as consumers and businesses had front-loaded spending in the first quarter to beat the 1 April increase in sales tax. Economists expect spending to pick up again in coming months.

The results were a stark contrast to the annual 6.1% growth in the first quarter of the year, which reflected the rush to beat the tax rise.

The government, under Prime Minister Shinzo Abe and his "Abenomics" strategy, has been trying to pull the world's third-biggest economy out of two decades of stagnation by expanding the money supply, freeing up regulations and encouraging the yen to fall, a move that helps exporters such as Toyota and Canon.

But the government is also concerned about ballooning public debt and raised the consumption tax to 8% from 5% to shore up its coffers.

Previous administrations have been nervous about raising taxes, for fear of pushing the economy into a recession. The Japanese economy has been eking out growth or at least staying flat in recent quarters, thanks partly to Abenomics.

Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, said the contraction was within his expectations, but the slowdown reflected not only the tax rise but also lower incomes and price increases from other sources.

"The impact from the tax is going to be short term," Ueno said. "But the economy is ailing, and that's not good."

Public spending could prop up growth in the near term, he said. Even then, it will be hard for any expansion to immediately and totally make up for the big drop for the latest quarter, he said.

Dramatic wage increases are not likely in Japan, and the recent trend of rising prices is part of Abe's strategy to reverse Japan's debilitating spiral of deflation, or falling prices.

Others were more optimistic. "We believe real GDP will return to growth exceeding potential," in the next quarter, said Kyohei Morita and Yuichiro Nagai of Barclays, noting in a report that leading economic indicators have started to turn up already, such as public works and housing construction orders.

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