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Economy rated as ‘recovering’

Abe team cites rise in consumer spending ahead of sales tax hike

Kyodo

The government on Friday revised upward its basic assessment of the economy, describing it as “recovering” for the first time in six years, on the back of robust consumer spending ahead of the sales tax hike in April and improvement in business investment.

“The Japanese economy is recovering at a moderate pace,” the Cabinet Office said in its monthly economic report, in which it upgraded its views on three of the 14 categories — consumption, business investment and business failures.

It was the first time for the government to specify the economy as “recovering” since January 2008, before it started to languish against a backdrop of the global financial crisis triggered by the collapse of U.S. investment bank Lehman Brothers Holdings Inc. in September that year.

“In light of their recent behavior, consumers have apparently begun to feel that the economy has been certainly recovering,” economic and fiscal policy minister Akira Amari said at a press conference after the release of the report.

“We decided to raise our economic assessment, believing that the economy is on the verge of entering a virtuous cycle,” where expansion in corporate earnings leads to wage growth, resulting in more consumption as the cycle repeats, Amari added.

Prime Minister Shinzo Abe’s 13-month-old administration — which is trying to beat nearly two decades of deflation — also said in the report that prices are “holding firm,” and called on the Bank of Japan to achieve its 2 percent inflation goal “at the earliest possible time.”

For three months until last month, the government left its basic economic assessment unchanged, saying the economy “is on the way to recovery at a moderate pace.” Last month, it dropped the word “deflation” from the report for the first time in more than four years.

In January, the Cabinet Office raised its views on consumer spending for the second straight month, saying it “is increasing, showing a last-minute rise in demand before a consumption tax increase in some sectors.”

But the government was concerned that the scheduled 3-percentage-point sales tax hike to 8 percent may make consumers reluctant to buy luxury goods such as cars, stifling the nascent economic recovery and hampering price rises.

“A last-minute rise in demand before a consumption tax increase and subsequent negative reaction are expected,” the report said.

The latest data showed household spending, a key indicator of private consumption accounting for around 60 percent of Japan’s gross domestic product, rose in November for the third consecutive month, up an inflation-adjusted 0.2 percent from a year earlier.

During the same month, consumer prices rose 1.2 percent year on year, topping the 1.0 percent level for the first time in five years.

The Japan Center for Economic Research, however, said Wednesday that Japan’s GDP is forecast to shrink 4.5 percent in the April-June period as the tax hike is likely to hurt consumption and investment, citing the average projection of 40 private-sector economists.

The Cabinet Office, meanwhile, expressed optimism about the corporate sector in January, given that profits have been recuperating, upgrading its assessment of capital spending for the first time in four months and of business failures in nine months.

“Business investment is picking up” and the number of business failures “is moderately decreasing,” the report said.

Core private-sector machinery orders, widely regarded as a leading indicator of capital spending, rose a seasonally adjusted 9.3 percent month on month in November, up for the second straight month, the government said Thursday.