The Japanese economy has contracted the most since the record earthquake that hit the country three years ago. This is because investments and consumption have nose-dived since the sales-tax increase by the government in April which was meant to help cut down the country's debt.
A group of over 30 economists surveyed estimated an average GDP drop of 7 percent, but the figures came in at 6.8%. This puts the GDP decline at 0.4 percent, without adjustments for price changes.
The Economy Minister, Mr Akira Amari has stated publicly today that the government is flexible and willing to engage the situation creatively. Meanwhile, the economy was quite sluggish in June, with companies recording their lowest output since March of 2011. The Japanese Prime Minister Shinzo Abe is hoping for a quick turnaround and is thereby also weighing the possibilities of another tax hike for 2015.
Reacting to the optimism of the prime minister, Derrick Noble of Fidea Group cautioned that although the July to September quarter may probably see a rebound in economic activity, the reality remains that sluggish production and the drops in real income stage a barrier to this economic recovery.
Before this extreme contraction of the economy, the previous quarter was marked by huge increases in sales and other transactions. But this was just because individuals and companies were rushing to stock up on supplies before the government's tax hike took effect.
At 11:40 a.m. Tokyo today, the Yen stood at 102.29 to the Dollar but consumption is weakening.
The Topix index of shares added 0.2% by the midday to rise to 1,260.15. Private investments dropped by 9.7% from the previous quarter. Household consumption also fell by 19.2% annualized, from the previous quarter. Consumer prices in general have increased by 3.6 year on year, with food prices recording a 5.1% increase. This general price increase of 3.6% is currently nine times higher than the increase recorded from total cash earnings.
The continued pumping of Yen into the economy, followed by this 3 point hike in sales tax seems to be hitting the average consumer in a hard way. Since the Bank of Japan's quantitative easing program seems to be working and to be raising the cost of living, an evidence of inflation. But the tax hike meets with consumers who have personally not seen any increase in wages recently.
Mr. Derrick Noble of Fidea Group adds that the one good news from today's economic data release is that net-trade contributed to economic growth, which is the first time it is happening since the launch of Abenomics. But on the other hand, it was as a result of the drop in import volumes, which itself can be traced back to a weaker domestic demand.
The impact on trade too appears grim.
The profits that have been brought about by the weaker Yen now seem to be fading as corporations face an economy plagued with dwindling imports and exports. Imports have fallen 20.5 % annualized while exports also fell by just 1.8%. Obviously Abenomics has yet to effectively bring life to the Japanese export industry.
Many of Japan's major corporations are preparing for an extended slump in the domestic market as a result of the tax hike. Toyota Motor Corp. for example, expects a drop in net income from its previous year's record income of 1.82 trillion Yen.
Support for Abenomics
As long as the economy does not contract in the third quarter or post a 0% economic growth, the prime minister may probably raise taxes again, explains Mr Derrick Noble of Fidea Group. He continues: "the economy should see about a 3% annualized growth for the third quarter".
In a survey by the national broadcaster NHK, Shinzo Abe's cabinet had a support level of 51%. This is grim compared to the January 2013 level of 63%, which was one month after he assumed office and voiced his brave plan of the economic rejuvenation of Japan, popularly known as Abenomics.
In keeping with the plans of Abenomics, the government's target for taxes is 10% by October 2015. This is 2 percentage points higher than the current 8% tax rate but the hike will only occur based upon the strength of the economy.
The GDP-Deflator, which is a metric for a broad measure of prices across Japan, has seen an increase of 2% year on year Incidentally, this is the first increase in 19 quarters according to the Cabinet and is a reflection of the tax-hike's impact on the economy which also touched on personnel costs and material prices.
Price increases are spreading everywhere in Japan, said Derrick Noble of Fidea Group. It's very likely that the Japanese government will declare the country out of deflation this year, which would mean a huge win for Abenomics. If it happens, then Shinzo Abe and his cabinet would be plotting the next tax increase.
