Sales tax tips Japan back into recession
Japan’s economy tipped into a technical recession following a jump in consumption taxes in April, making it a near-certainty that prime minister Shinzo Abe will delay another increase while appealing for a fresh mandate via a snap election. Monday’s preliminary data for the period between July and September was far worse than markets expected, showing a shrinkage of 1.6 per cent quarter-on-quarter on an annualised basis against analysts’ expectations for growth of 2.2 per cent, as businesses cut back spending. The big swing factor that caught out economists was a big drop in companies’ inventories, which shaved off 0.6 percentage points from the headline gross domestic product number. If inventories had been flat, quarter-on-quarter growth would have been 0.2 per cent. Yet even excluding inventories – which are notoriously hard to predict – the figures on household consumption and capital spending showed that Japan’s recovery after the tax-increase in April, from 5 per cent to 8 per cent, has been "very, very slow", said Kazuhiko Ogata, chief economist at Credit Agricole in Tokyo. The latest contraction, coming after a 7.3 per cent shrinkage in the second quarter, means that Japan is now back in a technical recession – its fourth since the Lehman crisis. "Given this number there is now no doubt that Mr Abe will announce the postponement of the tax increase and call for a snap election," he said. In the minutes after the data were released by the Cabinet Office at 8:50am on Monday, the dollar/yen rate leapt through 117, reaching its weakest level for more than seven years. The Nikkei 225 average fell about 1.5 per cent in the opening hour of trading, with defensive sectors such as utilities and healthcare bearing the brunt of the sell-off. The government had indicated that it would wait for the second estimate of third-quarter GDP, due on December 8, before making a decision on whether to go ahead with the second increase in the consumption tax to 10 per cent, scheduled to take effect next October. But over the past week speculation has been mounting that Mr Abe is preparing for an 18-month deferral, and many expect him to confirm the decision by calling an election for December 14 on Tuesday. Positive growth of an annualised rate of about 3.8 per cent was probably the minimum threshold for going ahead with the tax increase as planned, said Etsuro Honda, an adviser to Mr Abe, basing his estimate on the average growth rate between January and June. More important, he said, are qualitative measures such as real wage growth and inflation expectations, both of which are more sluggish than policy makers would like. Article 18 of the tax-increase law, passed in autumn 2012, gives the government of the time latitude to consider the macroeconomic picture before pushing ahead with the fiscal squeeze. The two-stage tax increase has been endorsed by international bodies such as the IMF and the OECD as the best way of repairing the country’s stretched finances. "The impact of the first round of the consumption tax increase shows how serious we are about rectifying and consolidating our budget situation," said Mr Honda. Keeping the faith of non-Japanese investors is vital in Mr Abe’s campaign to shrug off years of mild but persistent deflation, said Mr Ogata. One way for the prime minister to do this is to demonstrate broad support from the Japanese people as he pursues longer-term reforms. "Approval from the public is crucial for Mr Abe to keep selling ‘Abenomics’ to foreign investors," he said.