Financial News

  • 14 August 2014, 7:04

Japan's GDP Shrinks 6.8% As Sales Tax Bites

Efforts to shore up Japan's public finances have had a negative impact on its economy, with GDP shrinking 1.7% in the second quarter alone.

A sales tax increase from 5% to 8%, which came into force in April, was blamed for the contraction in output during the period which came in at at annualised rate of 6.8%.

The decline in GDP was the worst since the economic tailspin that followed the March 2011 quake disaster and tsunami in north-eastern Japan but it was largely expected asconsumers and businesses had front-loaded spending in the first quarter to beat the tax rise.

The government took a relaxed view of the performance, with economics ministerAkira Amari saying: "Looking at monthly data during April-June, sales of electronics goods and those at department stores are picking up afterfalling sharply in April.

"The job market is also improving steadily. Taking these into account,Japan's economy continues to recover moderately as a trend and the effect of thesales tax hike is subsiding."

Economists also expect the effects of the tax increase to be temporary, with spending picking up in coming months.

Prime Minister Shinzo Abe's 'Abenomics' strategy has been aimed at pulling the world's third-biggest economy out of two decades of stagnation by expanding money supply, freeing up regulations and encouraging the yen to fall.

But it has also been concerned about ballooning public debt and acted through the sales tax increase despite a reluctance among previous administrations over fears such a move would spark recession.

Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, said the GDP slowdown reflected not only the tax hike but also lower incomes and price increases from other sources.

"The impact from the tax is going to be short-term but the economy is ailing and that's not good."

Dramatic wage increases are not likely in Japan, and the recent trend of rising prices is part of Abe's strategy to reverse Japan's debilitating spiral of deflation, or falling prices.

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