Tokyo, JAPAN, Nov 17, 2014 – Shinzo Abe vaulted into Prime Minister-ship on his economic policies, collectively known as Abenomics. The three “arrows” of monetary easing, fiscal stimulus and structural adjustments were supposed to inject some life back into a stagnant economy that had spent most of the last two decades shrinking. However, with two of his arrows already having worked their way through the economy, recent data from the Japanese cabinet has shown otherwise, with a shocking -0.4% contraction in the economy, when growth of 0.5% was expected.
In the near term, this means that Abe’s planned sales tax increase by October 2015, is almost certain to be delayed, despite pressure from political colleagues, the finance sector, and major corporations, who assert that not increasing the sales tax to 10% would be an admission of failure. However, if the sales tax were to increase historical precedent has shown that it has the potential to impact the economy more severely than anticipated. Consumption in Japan has always been strongly linked to the sales tax, and the previous increase in 1997 from 3% to 5% led to such a downturn in consumption that it led Japan into a persistent deflationary cycle. Shinzo Abe is in the unenviable position of “picking his poison”, whether that is political repercussions or economic, he faces a leadership election next year.
The IMF expected the 3% sales tax increase in April of this year to cut growth from 2.6% to 1.4% from 2013 to 2014, but instead, it led to the worst contraction in any quarter since the first quarter of 2009. Despite a lower yen, and a buoyed stock market, exports have actually fallen (Japan’s trade deficit narrowing has largely been a result of lower demand for imports), and consumption has remained flat as real incomes are in decline. A Kyoto News poll in January 2014 found that 73% of Japanese respondents had not personally noticed the effects of Abenomics, only 28 percent expected to see a pay raise, and nearly 70% considered cutting back spending with the April sales tax hike.
There is some good news, however, as this -0.4% contraction has brought the annualized growth rate back up to -1.6%, from -7.3% in the last quarter.
Tokyo has said it would wait to see the final estimate for third-quarter growth, due next month, before making a decision on the October 2015 tax hike.