Japan's retail sales see deepest slump since 2015 as tax hike hits demand

Japan’s retail sales tumbled at their fastest pace in more than 4½ years in October as a sales tax hike prompted consumers to cut spending, raising a red flag over the strength of domestic demand.

The government increased the nationwide sales tax from 8 percent to 10 percent on Oct. 1, in a bid to fix the nation’s public debt burden, which is the heaviest in the industrial world and more than twice the size of the country’s gross domestic product.

However, some analysts have warned that the tax hike, previously postponed twice, could leave the economy without a growth driver amid a slump in exports and production and as other factors drag on the consumer sector.

Retail sales fell 7.1 percent in October from a year earlier, pulled down by weak demand for big ticket items such as cars and household appliances as well as clothing, trade ministry data showed on Thursday, with department stores hit particularly hard.

The drop was the biggest since a 9.7 percent fall in March 2015, and was worse than a 4.4 percent decline predicted by economists in a Reuters poll.

“Regardless of today’s outcome, consumption has been of a weak tone, and consumer sentiment is getting worse,” said Taro Saito, executive research fellow at NLI Research Institute.

“Incomes haven’t been rising originally, so consumption hasn’t been growing since before the sales tax hike.”

The slump was also sharper than the declines reported after the previous two sales tax hikes, in 1997 and 2014. Seasonally-adjusted retail sales dropped 14.4 percent month-on-month in October, the data showed.

“Retail sales fell more sharply in October than after previous sales tax hikes,” said Tom Learmouth, Japan economist at Capital Economics.

“The fall in sales was slightly larger than the 13.7 percent m/m plunge which followed both the 1997 and 2014 sales tax hikes,” he wrote in a note. Sales fell 4.3 percent in April 2014, the month of the previous tax hike.

The negative reading comes after separate data this month showed that Japan’s economy nearly stalled in the third quarter, while exports in October shrank at their fastest pace in three years.

The gloomy conditions have led to calls for the government to compile a big spending package to keep the country’s fragile economic recovery on track.

The previous tax hike, from 5 percent to 8 percent in 2014, hit the broader economy hard as households tightened their purse strings after front-loading purchases before the hike.

Policymakers this time around do not expect the October tax hike to trigger such a big swing in demand, given that the hike is smaller and that various measures have been taken to help offset the hit to spending.

However, analysts said retail sales in October were also hit by poor weather, after a huge typhoon ripped through central and eastern Japan, forcing stores and restaurants to temporarily close.

Others also noted more structural pressures faced by retailers even before the sales tax hike, such as the prolonged decline in real wages.

Data earlier this month showed that inflation-adjusted wages rose 0.6 percent in the year to September, their first increase since the end of last year.

All those factors pose challenges to a government seeking to shake consumers out of a long-entrenched deflationary mindset, which has weighed on prices, hurt company profits and established a prolonged regime of ultra-easy monetary policy.

Adding to these woes is the risk retailers will continue to cut prices to offset the hit from the tax hike. Many stores are also offering discounts for cashless payments.

The government has introduced a rebate program for cashless transactions designed to both soften the tax hike blow to retailers and encourage consumers to use electronic payments instead of cash.

Other retailers are simply reducing prices to lure customers.

“This could spark stiff price competition and induce deflation,” said Yukio Kawano, the head of Japan Supermarket Association. “Small firms that lack competitiveness will be forced out of business.”