Japan Boosts GDP Estimate as Abe Weighs Sales-Tax IncreaseJames Mayger, Toru Fujioka and Keiko Ujikane
Japan’s economy grew faster than previously estimated in the second quarter, aiding Prime Minister Shinzo Abe’s reflation campaign as he considers whether the nation can withstand a sales-tax increase.
Gross domestic product expanded an annualized 3.8 percent from the first quarter, higher than an initial estimate of 2.6 percent, reflecting stronger private capital investment, the Cabinet Office said in Tokyo today. The median forecast of 23 economists surveyed by Bloomberg News was for a 3.9 percent increase. The economy grew 4.1 percent in the first quarter.
Japanese stocks jumped and the yen weakened after Tokyo won a bid to host the 2020 Olympics, helping Abe’s effort to revive the world’s third biggest economy. Analysts from Fujitsu Research Institute to UBS AG said a sales tax increase in April is now a “done deal,” with Economy Minister Akira Amari saying today that a package of more than two trillion yen ($20 billion) may be needed to offset the economic blow and put Japan on a recovery track.
“The news on the Olympics will boost Abe’s popularity and that will be another push for him to raise the sales tax,” said Daiju Aoki, senior economist for Japan at UBS in Tokyo, who accurately forecast GDP growth of 3.8 percent. “A recovery led by Abenomics is accelerating. The effect of a weak yen is improving corporate profits and that is making companies willing to boost investment.”
The Nikkei 225 Stock Average gained 2.5 percent in Tokyo today. Dentsu Inc., which has broadcast rights for the games in Asia, surged 7.4 percent. The yen fell 0.6 percent to 99.71 per dollar as of 3:14 p.m.
There is a high chance that Abe will decided on the sales tax on Oct. 1, Amari told reporters in Tokyo. The BOJ will release a survey of business sentiment on that day.
The finance ministry estimates the setback to the economy from a sales-tax increase would be around 2 trillion yen, Amari said. A 5 trillion yen fiscal package will be needed to cushion the impact from the planned increase, according to a Bloomberg News survey of 23 economists in July.
Bank of Japan Governor Haruhiko Kuroda last week signaled policy makers can use extra fiscal and monetary stimulus to offset any hit to growth and help achieve the central bank’s 2 percent inflation target.
Japan’s economy will contract an annualized 4.4 percent in the three months starting April after six straight quarters of expansion, before returning to growth, according to the median estimate of economists surveyed by Bloomberg.
“The focus is shifting to how large an economic package is needed to diminish the negative impact of the tax hike,” said Aoki at UBS. “Abe will probably have to compile a fiscal stimulus package” of 5 trillion yen, he said.
Personal consumption growth slowed in the second quarter, with spending rising an annualized 2.9 percent after a 3.3 percent gain in the first three months of the year.
Consumer confidence fell in August to the lowest level since December, according to a Cabinet Office survey released today.
While a rise in bonuses boosted total cash earnings in July, wages excluding those payments and overtime dropped for a 14th straight month, according to Ministry of Health, Labour and Welfare data released on Sept. 3.
A moderate recovery is under way and delaying an increase in the sales tax could undermine confidence in Japan’s fiscal sustainability and lead to higher government bond yields, Kuroda said last week.
The sales tax is set to rise to 8 percent in April from 5 percent now, and then increase to 10 percent in October 2015, pending a final decision by Abe. The prime minister will weigh business confidence data on Oct. 1 in addition to the GDP data in making his decision.
Even with a higher levy, the central bank forecast the economy will grow 2.8 percent this fiscal year through March, and 1.3 percent the following year, according to the median estimate of the board members released in July.