Prime Minister Shinzo Abe will face a tough decision at the end of the year on whether to implement a further consumption tax hike to 10 percent.
The economy is expected to shrink after the consumption tax is first raised to 8 percent from 5 percent on April 1.
Gross domestic product data for July-September will be key to the prime minister’s decision on whether to give the green light to the additional tax hike to 10 percent in October 2015.
If the GDP data reveal a weak recovery from an expected slump in April-June, calls for additional stimulus measures may grow.
Growth was limited to an annual rate of 0.7 percent in October-December in price-adjusted real terms, a revised government report said Monday, shy of 1 percent for the second quarter in a row.
In light of the last-minute surge in demand ahead of April’s tax hike, “the results were relatively weak,” said economic and fiscal policy minister Akira Amari.
The latest estimates by 12 private-sector think tanks show that the economy will grow 4.7 percent in January-March on average before shrinking 3.7 percent in April-June in its first contraction in seven quarters.
For July-September, preliminary GDP data are due in November and revised figures in December. The think tanks project 2.2 percent growth.
Growth of 3 percent or higher will make the government confident, said Etsuro Honda, a key economic policy adviser to the prime minister.
“But a slower recovery will raise worries and could lead to a postponement of the tax hike,” he said.
Still, the tax hike plan has become law and a legal revision would be needed to postpone the additional increase. This would raise doubts about the government’s determination to tackle its tattered finances.
“In such a case, foreign investors would sell Japanese stocks, forcing the Abe government, which places importance on stock prices, into a difficult situation,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co.
Growth is unlikely to reach comfortable levels in July-September, said Junichi Makino, chief economist at SMBC Nikko Securities Inc.