Japan | Economy improved but weak; Abe set to delay tax hike

A man buys dried fish from a shop in Tokyo on May 18. Japan’s economy grew at a better than expected 1.7 percent annual pace in the first quarter of 2016

Japan’s economy remains weak but did better than expected in April, the latest data showed yesterday, as Prime Minister Shinzo Abe looked set to delay a 2017 tax hike to minimize shocks to the fitful recovery.
Factory output fell 3.5 percent in April from a year earlier and consumer spending edged lower, though both improved from the month before and were better than most forecasts.
Earlier data showed the consumer price index fell 0.3 percent in April, for the second straight month of deflation. However, excluding both energy and volatile fresh foods, it rose 0.7 percent.
The world’s third-largest economy has been stuck in the doldrums despite massive monetary easing aimed at vanquishing deflation, which tends to discourage corporate investment and consumer spending.
Though the latest data present a mixed picture, Prime Minister Shinzo Abe has won grudging support for a postponement of the next sales tax hike from a key ally: Finance Minister Taro Aso.
“It is one option to help support consumer spending,” Aso said of the likely delay.
Aso was obliged to at least try to push back: With Japan’s public debt at nearly 240 percent of its GDP, putting the nation’s accounts in order is an urgent priority. But those favoring a delay argue the recovery is too weak to endure a fresh hit to consumer spending from a tax hike.
They also contend that the tax hike could backfire if it causes such a downturn that government revenues actually contract.
In April, consumer spending fell 0.4 percent in April from a year earlier, though incomes rose 0.7 percent. Unemployment was flat at 3.2 percent.
Industrial output rose 0.3 percent from the month before, stronger than expected, in one sign the latest dip in growth may be moderating, said Marcel Thieliant of Capital Economics.
But he noted that private investment remains weak.
At a summit of the Group of Seven rich nations last week in central Japan, other leaders demurred at Abe’s insistence the world economy is on the brink of crisis.
Abe still cited the G-7’s backing for using all policy tools the countries can as a justification for a tax hike delay.
“The government probably wants to avoid delivering a hammer blow to a fragile economy without seeing solid improvement at the fundamental level,” Margaret Yang of CMC Markets, said in a commentary.
The last time Japan raised its sales tax, to 8 percent from 5 percent in April 2014, the economy fell back into recession. Growth has been uneven since then, and Abe opted to postpone the next increase to 10 percent, set for October 2015, to April 2017.
By pushing back the tax increase, Japan risks having its credit downgraded, though the impact would be limited by the fact that almost all of its debt is owned by domestic investors or the central bank.
“Whichever policy decision we take, there will be a risk,” said Sadakazu Tanigaki, secretary-general of the ruling Liberal Democratic Party.
The latest plan calls for the tax hike to take place in October 2019. Abe reportedly rejected the idea of dissolving the Lower House of Parliament and holding a snap election in July, when Japan is due to hold a vote for the less powerful Upper House. Elaine Kurtenbach, Tokyo, AP