Japan | Economy slides into recession as tax hike takes toll

People walk on a pedestrian crossing in Tokyo

Japan’s economy unexpectedly slid into recession as housing and business investment declined following a sales tax hike, further clouding the outlook for the global economy.
The world’s third-largest economy contracted at a 1.6 percent pace in the July-September quarter, the government said yesterday, contrary to predictions it would grow after a big drop the previous quarter. An economy is generally considered to be in recession when it fails to grow for two consecutive quarters.
This is not just bad news for Japan. It deepens global uncertainty as growth slows in China and remains nearly flat in the 18-country eurozone. Japan’s weakness could be a drag on growth elsewhere if its companies cut investment and buy fewer imports such as machinery, electronics, raw materials and food.
The gross domestic product figures showed across-the-board weakness in demand among consumers and manufacturers. Many individuals and companies stepped up purchases before the sales tax was hiked in April to 8 percent from 5 percent, and spending has languished since then.
“The impact of the sales tax was much more severe than expected,” said Junko Nishioka, an economist at RBS Japan Securities.
Housing investment plunged 24 percent from the same quarter a year ago, while corporate capital investment sank 0.9 percent. Consumer spending, which accounts for about two-thirds of the economy, edged up just 0.4 percent.
Given the contraction, Prime Minister Shinzo Abe is expected to announce today that he will delay a second sales tax hike, planned for next October. That would relieve pressure on the economy, but slow progress on efforts to rein in Japan’s government debt, the largest among industrialized nations.
Abe is also likely to use the decision to delay the tax hike as a reason to call a snap election in mid-December to secure a public mandate for this course of action. Given the drop in GDP, that choice may be puzzling, but the ruling Liberal Democrats have a solid majority and hope to consolidate their power further at a time when opposition parties are viewed as weak and in disarray.
Japan emerged from its last recession just as Abe took office in December 2012, vowing to restore the nations’ economic vigor after two decades of stagnation with a program, dubbed “Abenomics,” centered on lax monetary policy, strong fiscal spending and structural economic reforms.
But the country is struggling to regain momentum as its population declines and ages. Apart from its automakers, many Japanese manufacturers have lost their leading edge in innovation while shifting production to cheaper locations offshore.
Household incomes, meanwhile, peaked more than a decade ago, and a growing share of workers are having difficulty making ends meet with part-time, contract work. Wage increases — mostly limited to a small share of workers in big-name companies — have lagged behind inflation.
Most economists had forecast that Japan would expand at about a 2 percent pace after a sharp 7.1 percent annual pace drop in April-June immediately following the tax hike. Compared to the previous quarter, GDP declined 0.4 percent.
Delaying the next tax hike could undermine confidence in Japan’s ability to repair its battered finances, but the risk to Japan’s recovery is a greater threat, said economist Koichi Hamada, who likened April’s tax increase to excess payload on the “rocket of Abenomics.”
Hamada, an Abe adviser, had publicly urged the prime minister to raise the sales tax in stages rather than by 3 percentage points at one time.
“Tax rate increases are not meaningful if they don’t increase tax revenues,” Hamada said yesterday.
Critics say Abe has failed to deliver on promises for drastic reforms of labor regulations, the tax system and the health industry, among other areas. Meanwhile, companies have failed to pass windfall gains from higher share prices and surging profits on to their workers in the form of higher wages. Elaine Kurtenbach, Business Writer, Tokyo, AP