Last April, Japan's government implemented a long-planned consumption-tax hike, from 5 percent to 8 percent, the first in a two-step increase that is expected to bring the rate to 10 percent by 2015. The hike, a key feature of "Abenomics," Prime Minister Shinzo Abe's three-pronged strategy to revive Japan's economy, signals the government's long-term commitment to fiscal consolidation. But it has also dealt Japan a heavy macroeconomic blow.
Preliminary GDP data show a 6.8 percent contraction year on year in the second quarter of this year — the largest since the 2011 earthquake and tsunami that devastated the country. Moreover, consumer spending fell by a record amount, contributing to a total real (inflation-adjusted) decline of 5.9 percent from last July.
But it is not all bad news. Expansionary monetary policy — the second of three so-called "arrows" of Abenomics, after fiscal stimulus — has brought down the unemployment rate to just 3.8 percent. The ratio of job openings to applicants has exceeded parity, and the GDP deflator narrowed to close to zero.