Business / Economy

Household spending takes 5.1% dive as Japanese tighten purse strings after tax hike

Reuters, Kyodo, Staff Report

Economic figures released Friday have amplified concerns among government officials and some economists about the extent of damage to the nation’s fragile economy caused by the October consumption tax increase.

Households cut their spending for the first time in almost a year in October as natural disasters disrupted business and the sales tax hike, from 8 percent to 10 percent, prompted consumers to rein in expenses.

Household spending dropped 5.1 percent in October from a year earlier, government data showed Friday, down for the first time in 11 months and the biggest year-on-year fall since March 2016 — when spending fell 5.3 percent. The figure was also weaker than the median forecast for a 3.0 percent decline. That marked a sharp reversal from the 9.5 percent jump logged in September, the fastest growth on record as consumers rushed to buy goods before the Oct. 1 tax rise.

“Not only is the sales tax hike hurting consumer spending but impacts from the typhoon also accelerated the decline in the spending,” said Taro Saito, executive research fellow at NLI Research Institute.

“We expect the economy overall and consumer spending will contract in the current quarter and then moderately pick up in January to March, but such a recovery won’t be strong enough.”

A Cabinet Office official said it would be necessary to monitor outcomes for November and beyond to assess the impact of the tax hike, as household spending fell year-on-year for 13 consecutive months after the previous one.

“As the typhoon had a large impact (in the reporting month), it is hard to judge the exact impact of the tax hike,” said Koichi Fujishiro, senior economist at the Dai-ichi Life Research Institute.

“But judging from separate data for November, such as weak department store and auto sales, other items (which do not appear in such data) are also expected to be affected by the tax increase,” Fujishiro added.

The Cabinet Office’s coincident index of business conditions for October, which was also released Friday, dropped 5.6 points from the previous month to 94.8 against the 2015 base of 100 — the lowest since February 2013.

The margin of decline is the biggest since March 2011, when a catastrophic earthquake and tsunami struck Japan’s northeastern region. It is also the third-biggest on record.

The office maintained its assessment that the world’s third-largest economy has likely fallen into recession, using the term “worsening” — the most pessimistic expression — for the third consecutive month.

When Japan last raised the sales tax, in April 2014, household spending fell 4.6 percent to 8 percent from 5 percent. It took more than a year for growth to return.

Compared with the previous month, household spending fell 11.5 percent in October, the steepest drop since April 2014 and a faster decline than the median 9.8 percent forecast.

Analysts said Typhoon Hagibis in October, which lashed wide swaths of Japan with heavy rain and winds, also played a factor in the downbeat data. Some shops and restaurants closed during the storm and consumers stayed home.

Real wages adjusted for inflation edged up for a second straight month in October, but the higher levy and a weak global economy still raise worries about prospects for consumer spending and the overall economy.

While the government has sought to offset the hit to consumers, through vouchers and tax breaks, there are fears the higher tax could hurt an economy already feeling the pinch from global pressures.

Japan unveiled a fiscal package Thursday comprising ¥13.2 trillion in public-sector spending to support stalling growth and as policymakers look to sustain activity beyond the 2020 Tokyo Games.

A recent spate of weak data, such as exports and factory output, have magnified concerns about the risk of a sharper than expected slowdown. The economy’s growth in the third quarter, an annualized 0.2 percent, was the weakest pace in a year.