How Japan’s Sales Tax Hike Affected the Economy So Far

Economic analysts have been buzzing about the potential negative effects of a Japanese sales tax hike from the moment that the government first brought the idea up. Well, now that the April numbers are out, let’s take a quick look at how the Japanese economy has been faring.

Consumer spending

Aghh, I’m seeing red! It’s really no surprise that consumer spending took a huge hit when the sales tax hike was implemented, as the jump in tax-inclusive prices of goods tends to discourage people from making purchases. Analysts were already expecting to see a 1.6% year-over-year drop in retail sales and a 3.4% annualized decline in household spending for April, but the actual figures came in much weaker than expected.

Retail sales slipped by 4.4% in April while household spending fell by 4.6% in the same month. This marked the fastest annualized pace of decline in three years, as sales of cars and electronics accounted for much of the drop. On a month-over-month basis, April retail sales are down by 13.7%, its steepest monthly drop in 14 years. Despite these dismal figures, the Japanese government insists that the effect of the tax hike on consumer spending is only temporary. We’ll see about that!

Inflation

As for inflation, it’s also not surprising that the sales tax increase boosted price levels to record highs. For April, the core CPI surged by 3.2% from a year earlier, its fastest pace of increase since 1991. At that time, the Japanese government also implemented a national sales tax hike.

In Tokyo, the April core CPI showed a 2.8% annualized gain, slightly higher than the previous month’s 2.7% figure but a notch lower than the estimated 2.9% increase. Still, the data showed its fastest rate of increase in 22 years! Looks like the tax hike is giving the BOJ a helping hand when it comes to warding off deflation in Japan.

Industrial Production

Meanwhile, industrial production hinted at bleak prospects for the country, as the report showed a 2.5% decline for April. This was way worse than the estimated 1.9% dip, although the previous month’s reading enjoyed an upward revision from 0.3% to 0.7%.

Take note though that this is just the preliminary reading for April and that the second version of the report due in a couple of weeks might also see some revisions. Weak data, however, could be a signal that businesses are scaling down their production levels to anticipate weaker consumer demand in the coming months.

What do you think of Japan’s post-tax hike figures? Just a knee-jerk reaction to the tax increase or indicative of an economic slowdown? Would these force the BOJ to rethink their optimistic outlook? Cast your votes in our poll below!