Economic data released Friday signaled that the economy is still in the doldrums following the first stage of the doubling of the consumption tax on April 1, raising doubts about whether the Abe administration can complete the hike to 10 percent as planned.
Expectations are growing for more economic stimulus in the near future, regardless of whether next year’s tax hike is delayed.
With the pace of inflation slowing, the Bank of Japan decided Friday to take further action to achieve its 2 percent inflation target by “sometime next year.”
The BOJ’s surprise move is intended to boost the economy by weakening the yen to help exporters, paving the way for the second stage of the hike and fending off concern the central bank will act to finance the government’s huge pile of bonds, some analysts said.
The Internal Affairs and Communications Ministry reported Friday that average household spending in September slipped an inflation-adjusted 5.6 percent from a year earlier, the sixth consecutive drop, after the first consumption tax hike in 17 years.
The availability of jobs in September fell for the first time in three years and four months, declining to 1.09 from 1.10 in August, the Health, Labor and Welfare said, indicating that companies are reluctant to hire more workers amid an uncertain economic outlook.
The jobless rate rose to 3.6 percent in September, up from 3.5 percent the month before.
The core consumer price index, which excludes prices of volatile fresh food but not energy, grew 3.0 percent from a year earlier, but the pace was slower than the 3.1 percent gain in August, the internal affairs ministry said.
According to the BOJ, the tax hike to 8 percent from 5 percent pushed up inflation by about 2 points.
“Friday’s results showed that the pace of economic recovery after the tax hike is clearly slow,” said Taro Saito, senior economist at the NLI Research Institute.
Economic and fiscal policy minister Akira Amari told a news conference later in the day that “we will do whatever is necessary” and suggested that the Abe administration may compile yet another extra budget this fiscal year and delay the next tax hike.
Takeshi Minami, chief economist at Norinchukin Research Institute, said the government may be forced to put off the second hike to 10 percent in October 2015 because it is likely to stifle the recovery, which in turn would drive down tax revenue.
“The consumption tax hike is aimed at promoting fiscal rehabilitation. If tax revenues fall with the economy stalling, it is like putting the cart before the horse,” Minami said.
Abe has said he will decide on the tax hike by the end of this year after assessing economic indicators to be released through December, including the revised gross domestic product data for the July-September quarter.
A consumption tax hike is regarded as the critical first step to restoring Japan’s fiscal health — the worst among the major industrialized economies.
The economy, however, contracted an annualized real 7.1 percent in the quarter through June, its worst setback since the first quarter of 2009, when it fell an annualized 15.0 percent in the midst of the 2008 global financial crisis.
Legislation enacted in 2012 states that the government will seek to attain nominal economic growth of around 3 percent and real growth of about 2 percent as a nonbinding target for going ahead with the tax hike.
To avoid a further economic weakness and to stick with the next tax hike, the administration plans to take economic stimulus steps in two stages, sources close to the matter said Friday.
The administration is set to compile the usual supplementary budget this fiscal year to prop up the economy, but include unspecified measures to bolster domestic demand in the initial budget for fiscal 2015, if Abe decides to proceed with the tax hike, they added.
The BOJ took an unexpected step at its Policy Board meeting on Friday, before any concrete action by the government.
The bank announced it will pump an additional ¥10 to ¥20 trillion annually into the market to further loosen credit conditions.
Under a radical policy launched in April 2013, the BOJ pledged to increase Japan’s monetary base by ¥60 to ¥70 trillion a year to drive the nation’s inflation rate to 2 percent in a bid to halt deflation.