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Japan’s economy takes a dive as Abe weighs delay of second tax hike

Bloomberg

The economy unexpectedly sank into a recession in the last quarter, unable to shake off the impact of April’s consumption tax hike and raising the odds that Prime Minister Shinzo Abe will postpone a second increase next year.

Gross domestic product shrank an annualized 1.6 percent in the three months through September, the Cabinet Office reported Monday, a second consecutive decline that matches the textbook definition of a recession.

Unadjusted for price changes, the economy contracted an annualized 3 percent, the Cabinet Office said.

“April’s sales tax hike completely destroyed Japan’s economy. No part of the economy looks encouraging,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, who had forecast a 0.8 percent rise for real GDP, the weakest estimate in a Bloomberg survey.

“Today’s data will leave another traumatic memory for Japanese politicians about sales tax hikes,” he said. The nation also tipped into a recession after the levy was raised in 1997, causing the government at the time to fall.

For Abe, the report may guarantee he will put off the second tax increase scheduled for October 2015, a development observers say will trigger a snap general election next month.

While exports and consumer spending returned to gains last quarter, and government spending had a positive impact on GDP, this wasn’t enough to offset the impact of a slump in stocks of unsold goods, a sign that companies were unwilling to boost production. Residential investment was another soft spot.

Nominal GDP, which is unadjusted for price changes, also shrank for a second straight period, marking at least the fifth recession using those criteria in the past decade. This figure, which is critical when considering tax revenue and corporate profits, is 7.9 percent below the peak reached in 1997, according to data compiled by Bloomberg.

The Abe administration is seeking to shore up public support after April’s levy increase triggered the deepest contraction in more than five years. Etsuro Honda, an adviser to the prime minister, said last week that a tax increase is out of the question if growth turned out to be less than 3.8 percent.

“Japan is in recession — was pushed into recession by the VAT (sales tax) hike,” Jesper Koll, head of Japan strategy at JPMorgan Chase & Co. in Tokyo, said in an interview. “Delay in the VAT hike is now a virtual certainty.”

Stocks plunged in Tokyo and the yen slid against the dollar after the data were released, briefly dropping below the ¥117 level for the first time since October 2007.

Abe is considering postponing the next tax increase until 2017, sources with knowledge of the talks said last week, and while a general election isn’t due until 2016, he will call an early vote to get public backing for his move. Minister of Economy, Trade and Industry Akira Amari said Monday that Abe would make a decision as early as Tuesday.

The GDP data were released two days before the Bank of Japan’s next policy meeting. BOJ Gov. Haruhiko Kuroda last month led a divided board to surprisingly expand a monetary-stimulus program already unprecedented in scale, after inflation forecasts drifted lower and further away from his 2 percent target.

While the pace of consumer price gains is running at about 1 percent, that still amounts to a sea change for households accustomed to modest deflation for about 15 years. Hiking the sales tax to 8 percent from 5 percent in April also pushed up the cost of living, straining households already pressured by the rising prices.

With inflation outpacing wage growth, a further bump in the levy slated for next October, to 10 percent, risks hurting consumption and undermining Abe’s support.

He has the power to call off the hike, the second of the two-stage increase legislated by the previous government, based on the health of the economy.

The median forecast for annualized real growth last quarter was 2.2 percent. The median estimate for nominal GDP was for a 0.4 percent advance.

Compared to the previous quarter, private consumption rose 0.4 percent in the July-September period, compared with a 5 percent drop in the second quarter, the Cabinet Office report showed. Capital spending dropped 0.2 percent in the quarter, compared with a 4.8 percent decline in the previous three-month period.

Net exports, or shipments less imports, added 0.1 percentage point to GDP, after a 1 percent gain in the previous quarter.

In December, the government approved a ¥5.5 trillion addition to the budget in December to help the economy weather April’s tax hike. Finance Minister Taro Aso has signaled readiness to boost stimulus and Abe said last week he would consider compiling an extra budget depending on the economy.

The government is considering measures that may amount to between ¥3 trillion and ¥4 trillion to support the economy, according to a Yomiuri Shimbun report Oct. 31.

Abe’s ruling Liberal Democratic Party is considering steps to protect against the impact of a weaker yen and higher energy prices as part of a campaign platform for a possible election, the Nikkei newspaper reported last week.

A group of LDP lawmakers who want to delay the next bump in the sales levy estimate the government could have as much as ¥4.6 trillion available to spend on its economic stimulus if it doesn’t increase the sales tax next year.

Postponing the planned increase by about 18 months would add about 0.5 percent to growth, the group said in a discussion paper obtained by Bloomberg News. The lawmakers, led by Lower House member Kozo Yamamoto, estimate that this expansion would have a bigger impact on the amount of tax raised than increasing the levy and risking another economic contraction.

In 1997, then-Prime Minister Ryutaro Hashimoto oversaw a 2 percent boost in the consumption levy. The move cost him his job as the country sank into a recession, with consumption swooning against a backdrop of weakening demand abroad in the midst of the Asian financial crisis.

  • http://www.sheldonthinks.com/ Andrew Sheldon

    Silly to tax consumption. They should be taxing assets. Don’t they understand economics.

    • rossdorn

      You are a comedian?

      Tax assets instead of people, very funny…
      Whose government do you think this is? The people’s?

      • http://www.sheldonthinks.com/ Andrew Sheldon

        So you agree, but you cynically don’t believe in representative democracy? We are apparently on the same page. Can’t hurt to see things for what they are. I’ll leave you to cry into your pillow like a real man. lol. I think you are referring to satire.

      • rossdorn

        I think (not believe) that representative democracy is a great idea for a self-thinking, educated population whose only value is NOT greed.

        In countries where the population consists of 90% manipulated, semi-retarded morons, which is just about every single country on the planet, I do not think representative democracy makes a lot of sense.
        And Japan is a perfekt example for that theory, would you agree?
        Like the US was, where Georg W was a true representative of the people….

        Could you elaborate on the crying in my pillow?

      • http://www.sheldonthinks.com/ Andrew Sheldon

        Hehe…I think you just set yourself up for a systemic risk there. You want to exclude from politics the people who ‘want stuff’, and leave it to the people who profess altruism. Wrong creed my friend. Quote from Hitler “You are nothing, your nation is everything’. You’re walking on the ‘dangerous side’. Granted, he was not a thinker, so you get half points. I think 90% of counrtries are morons ‘because’ of representative democracy.
        Pillow talk is a waste of time. lol

      • rossdorn

        You might want to stop interpreting your beliefs into what I write and try to stick to what I actually write…?

        “You want to exclude from politics the people who ‘want stuff’, and leave it to the people who profess altruism.” and “You are nothing, your nation is everything’.”

        Where on earth did you find that?

        I simply described why democracy can bring never bring about anything more worthwhile than what there is now.
        But election results always give a good idea what the people in a country are about.
        Not in one word did I suggest there is a better option….

        We humans have a certain of being and this is the only way a world can be which is inhabited by such beings. Its actually all quite easy to see… of course one has to want to see it.
        Once you see it, you say “Aha!” and go on with your life… watch what goes on, and if it becomes necessary… act accordingly.

        At present there is no telling if the “wisdom” of the Abes of this land, combined with the present economic and foreign constellation, will result in a war. Once it is possible to see what will happen, one can either sit back, or, pack one’s suitcases….

        Let me remind you that this conservation started with your statement: “Silly to tax consumption. They should be taxing assets.”
        Which is an utterly absurd assumption.
        Not that it would be bad for the people or the economy, but given the reality of who has power in this country and in whose interest they govern… your suggestion seems childish.
        Why would anyone do that?

    • phu

      It’s a fun idea, but I think it’s obvious from the way people evade income tax (which is the only reason it doesn’t work as well as it should) that they could hide their assets as easily as, if not more easily than, they hide their income. Or they could just switch from their current “I don’t actually make money” model to taking a huge salary and “spending” it on fabricated securities, which are taxed differently, or using some other means of hiding their real assets.

      To suggest that a different type of taxation is any kind of solution is naive unless you address the underlying issues with the application and enforcement of taxation. Of course, in Japan, there are far larger issues to address before you can even discuss those things… so your point, whether valid or not, is so far from reality that it’s hardly worth the bandwidth it’s eating.

  • https://www.twitter.com/chipmaker_tweet Kal Gandikota

    I empathize with all those who are going to loose jobs due to Japan’s recession. (I went through the Great Recession in 2009 myself).

    I wish those getting laid-off do not get discouraged if they cannot find new jobs. There are interesting things happening in the fields of technology/finance/medical etc all over the world. The American/Japanese/Korean/Middle-East investors are investing heavily in India, Vietnam etc besides China… Also look at other countries in Europe(countries are coming out of recession)…South America…Africa..Asia…

    With Internet, the jobless could search for jobs and initiate conversations with prospective employers from where they live. They can still take up jobs in technical/business/research/even education jobs (like teaching, researching at universities & schools) not only in Japan but across the world. If money is not concern and they like traveling around the world, then there are poor but developing countries that are looking for skilled workers who are ex-employees from reputed organizations and countries. :)

  • rossdorn

    Everybody with have a brain understands, that simply pumping cash into an economy will create a bubble… nothing else.

    Be prepared to pay the coming bills, voodoo economics is expensive.

    • http://www.sheldonthinks.com/ Andrew Sheldon

      It doesn’t have to create a bubble, it just has in this case, i.e. The Nikkei 225. Wage or ‘cost-of-living’ inflation was the other prospect. There is simply not the market conditions to make that possible.

  • Internet Terracotta Tiger

    Even if it were to rise from 8% to 10%, Japan’s VAT tax would still be only two-thirds of Canada’s and about half that of some affluent European countries. It just seems that Japanese consumers generally save far more and spend far less than do their Western counterparts, possibly because of the long life expectancy. The gov’t seems to be nudging corporations to raise salaries (which seems like a good idea), I think it might also push them into raising domestic production. They’re certainly raking it in overseas these days.

  • tiger

    I would argue that the sinking into recession is hardly unexpected. It’s probably deeply rooted in the population decline of Japan, the loss of competitive advantage in key industries, the dependence on imported material, and the failure to open oversea market (mostly due to poor political choices) among other things. Money printing will not cure the issue.