Japan’s Below-Forecast Growth Fuels Sales-Tax DebateKeiko Ujikane and Toru Fujioka
Japan’s economy slowed more than forecast in the second quarter as businesses cut investment, undermining gains in consumer and government spending that helped reduce deflationary pressures.
Gross domestic product rose an annualized 2.6 percent from the three months through March, when it climbed 3.8 percent, the Cabinet Office reported today in Tokyo. The median of 32 estimates was for a 3.6 percent gain. Unadjusted for price changes, nominal GDP growth accelerated to 2.9 percent.
The report adds to the debate on whether Japan is strong enough to sustain a planned 3 percentage point bump in the sales tax in April, with Prime Minister Shinzo Abe deciding in coming months on whether to proceed. While consumers continue to propel Japan’s rebound, companies have yet to commit to the Abenomics project, paring capital spending for a sixth straight quarter.
“Opponents will gain momentum to try to prevent raising the sales tax, while politicians who back it will reinforce their argument by pointing to positive consumer spending and price data,” said Hideo Kumano, executive chief economist at Dai-ichi Life in Tokyo who previously worked at the Bank of Japan. Apart from the debate, the data show “the economy is making a step forward to ending deflation,” he said.
The Topix was down 0.4 percent as of 1:10 p.m. in Tokyo, while the yen fell 0.3 percent to 96.50 per dollar. The Topix has rallied about 42 percent since Abe swept to power in elections in December as he pledged to deploy monetary and fiscal stimulus, along with structural reform, to end 15 years of sustained deflation.
“The numbers continue to be good in terms of criteria to decide” on whether to raise the sales tax, Economy Minister Akira Amari told reporters after the release. “By using all available measures, including tax system, budget and financial measures, I expect capital spending will expand.”
Today’s report showed some evidence that efforts by Abe-appointee Haruhiko Kuroda, the governor of the Bank of Japan, are starting to bear fruit in combating deflation. The GDP deflator, a broad measure of prices across the economy, fell 0.3 percent in April-to-June from a year before, the smallest drop since the third quarter of 2009.
The nominal expansion exceeded real growth for the first time since the first quarter of 2012.
This shift “signals Japan is finally becoming a normal economy,” said Takuji Aida, chief economist at Societe General Securities Ltd. in Tokyo. “Still, it’s too early to say this trend will be sustained as temporary factors from government spending and a weak yen from monetary easing are key reasons for boosting the economy.”
A separate gauge of corporate goods prices released by the BOJ today showed an increase of 2.2 percent, the biggest since August 2011.
With Kuroda’s pledge to double the monetary base over two years, a slide in the yen has caused energy costs to jump -- especially with Japan’s deeper reliance on imports of fossil fuels since the shutdown of most of the nation’s nuclear-power industry since the Fukushima meltdown in March 2011. With little sign of companies raising employee wages, higher electricity costs crimp household budgets even before the scheduled step-up in the consumption tax in April.
Abe’s administration is forming a panel to analyze whether and how to proceed with the bump in the levy. Abe adviser Etsuro Honda is among those calling for an alternative. The government has said it will decide on the matter after revised GDP data due on Sept. 9.
Consumer spending, which accounts for about 60 percent of the economy, contributed 1.9 percentage point to the annualized real growth rate in the second quarter. Inventories subtracted 1.1 percentage point as companies drew down stocks of unsold goods at the fastest pace since the fourth quarter of 2011. Government spending and trade added 0.7 percentage point each.
Private residential investment fell an annualized 1 percent from the previous quarter, dropping for the first time since the January-March period of 2012.
Outstanding loans to individuals rose 3.2 percent last quarter compared to a year earlier, a separate report from the Bank of Japan showed last week. Spending on housing is likely to rise this quarter because of purchases ahead of the planned sales-tax increase in April, said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda Life Insurance Co.
While Abenomics has proved a boon to businesses by bolstering their profits, they have yet to return the favor by stepping up investment, which fell at a 0.4 percent annual pace.
With almost all of the Nikkei 225 Stock Average companies reporting, profit surged 103 percent last quarter and beat analyst estimates by 16 percent, the most in two years, according to data compiled by Bloomberg. Companies topping estimates range from Toyota Motor Corp. and Sony Corp. to Shiseido Co. and Kobe Steel Ltd.
The levy on consumption is due to be raised to 8 percent in April from the current 5 percent, followed by an increase to 10 percent in October 2015. A sales-tax law enacted last year gives Abe the power to postpone the rise should he conclude that the economy is unable to weather the austerity measure.
Kuroda last week warned against a delay in proceeding, saying that “ending deflation and raising the sales tax are achievable at the same time.”
Honda, a Shizuoka University professor and one of the brain-trust members behind Abe’s reflation plan, said last week that Japanese lawmakers are reluctant to reopen legislation on the tax rise. He favors an annual increase of 1 percentage point over the next five years to ease the burden on households.
Today’s data “signals that the economic recovery is strong enough to withstand an increase in the sales tax as scheduled,” Meiji Yasuda’s Kodama said. “There’s no need to be pessimistic about the outlook for Japan’s economy.”
Around Asia, Singapore today lowered its forecast for exports this year as a slowing expansion in China crimps demand, even as services helped the economy grow more than initially estimated last quarter.
Shipments may be unchanged or rise 1 percent this year, compared with a previous forecast of 2 percent to 4 percent, a trade agency said. GDP rose an annualized 15.5 percent in the three months through June from the previous quarter, when it grew a revised 1.7 percent, the Trade Ministry said separately.
India will report industrial production and consumer prices today, while elsewhere in the world, Israel today publishes monetary-meeting minutes.
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