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Government stays bullish on economy

Impact of tax hike expected to fade soon

Kyodo

The government on Friday remained relatively upbeat about the economy in its May report but downgraded its views on output and imports following the first consumption tax hike in 17 years.

Emphasizing that the negative impact of the April 1 tax hike is expected to fade soon, Prime Minister Shinzo Abe’s team also upgraded its assessment of capital spending, describing it as “increasing” for the first time in about six years.

“The Japanese economy is on a moderate recovery trend, while some weak movements are seen lately due to a reaction after a last-minute rise in demand before a consumption tax increase,” the Cabinet Office said in its latest monthly economic report.

The office lowered its views on industrial output and imports for the second month in a row as the 3-point tax hike to 8 percent dragged down domestic demand. It also downgraded its assessment of business confidence and bankruptcy cases in May.

“Industrial production is in a weak tone” and “imports are flat,” the report said.

Japan’s industrial output in March gained a seasonally adjusted 0.7 percent from the previous month, but manufacturers polled by the Ministry of Economy, Trade and Industry expect production to drop 1.4 percent in April and edge up 0.1 percent in May.

The value of imports rose 3.4 percent from a year earlier in April, up for the 18th consecutive month, although the pace of growth was much smaller than the 18.1 percent surge in March.

With department store and supermarket sales falling, “Private consumption has been showing weakness lately,” the report said.

An official of the Cabinet Office, however, said the slowdown since the tax hike has been “within expectations” so far and is likely to be “short-lived.”

The report suggested the government hopes steady improvement in corporate performance and massive public spending will help shore up the economy, despite fears that the tax hike may dampen consumer spending — the biggest component of gross domestic product.

The office raised its views on capital spending and public investment for the first time in four months and five months, respectively.

Aiming to prevent the tax hike from significantly hurting the economy, Abe’s administration has formed a ¥5.5 trillion supplementary budget for fiscal 2013 and a record-high ¥95.9 trillion general-account budget for fiscal 2014 that started in April, including several measures beneficial to businesses.

“Concerning short-term prospects, although weakness will remain for the time being due to the reaction after a last-minute rise in demand, the economy is expected to recover as the effect gradually lessens, while the effects of the policies support it,” the report said.

The Bank of Japan, which has been carrying out drastic monetary easing since April last year to achieve its 2 percent inflation target, is on the same page as the government on the future course of the country’s economy.

“Japan’s economy is expected to continue a moderate recovery as a trend, while it will be affected by the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike,” the bank said in a statement released after its two-day policy board meeting, which ended Wednesday.