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Business News/ News / World/  Japan’s GDP shrinks most since 2011 quake on sales tax
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Japan’s GDP shrinks most since 2011 quake on sales tax

GDP shrank an annualized 6.8% in the three months through June

The contraction followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose. Photo: AFPPremium
The contraction followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose. Photo: AFP

Tokyo: Japan’s economy contracted the most since the record earthquake three years ago as consumption and investment plunged after an April sales-tax increase aimed at curbing the world’s biggest debt burden.

Gross domestic product (GDP) shrank an annualized 6.8% in the three months through June, the Cabinet Office said. That was less than the median estimate of 37 economists surveyed by Bloomberg News for a 7% drop. Unadjusted for price changes, GDP declined 0.4%.

While Prime Minister Shinzo Abe is counting on a quick rebound, the economy was struggling in June, with output falling the most since March 2011 as companies tried to pare elevated inventories. The government is ready to take flexible action if needed, economy minister Akira Amari said on Wednesday, as Abe weighs whether Japan can bear another bump in the levy in 2015.

“The probability is high that the July-September quarter will see a rebound," said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. But the fall in real incomes and weakness in production could weigh on the recovery.

The contraction followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose. Abe’s striving to sustain a recovery after initial success in fighting off two decades of economic stagnation.

Consumption plummets

The yen was little changed at 102.25 per dollar at 10:14am in Tokyo. The Topix index of shares was also little changed.

Household consumption plummeted at an annualized pace of 19.2% from the previous quarter, while private investment sank 9.7%, highlighting the damage to demand by the 3 percentage point increase in the levy.

The higher sales tax hit consumers who’ve seen little growth in incomes and rising costs of living as the Bank of Japan (BoJ) stokes inflation with unprecedented easing. Consumer prices rose 3.6% in June from a year earlier—nine times the increase in total cash earnings—with food prices climbing 5.1%.

“The only apparent bright spot in Wednesday’s data was that net trade added to growth for the first time since the launch of Abenomics," Marcel Thieliant, Singapore-based economist at Capital Economics wrote in a note. “Unfortunately, this was mostly due to a collapse in import volumes as a result of weaker domestic demand, while exports showed a renewed decline."

Trade impact

Imports tumbled an annualized 20.5% while exports fell 1.8%. That’s sapping the manufacturing sector and shows the yen’s 16% drop against the dollar over Abe’s term has yet to drive outbound shipments.

The windfall in corporate profits that the weaker yen delivered to many Japanese manufacturers last year also shows signs of fading.

Toyota Motor Corp. last week kept its forecast for net income to fall from last year’s record 1.82 trillion yen, as Japan’s largest car makers braced for slumping domestic sales following the tax increase. Panasonic Corp. reported last month first-quarter profit that missed analyst estimates as fixed costs rose and demand for consumer electronics in Japan weakened.

The economy is forecast to grow an annualized 2.9% in the third quarter, according to a separate Bloomberg survey conducted 1 August to 6 August.

“Unless the economy posts zero growth or contracts in the third quarter, Abe may decide to raise the sales tax further," Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, said before the report.

The government aims to raise the sales tax to 10% in October 2015 from 8% now. Abe will decide whether to proceed with the plan by the year-end, based on the strength of the economy. Bloomberg

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Published: 13 Aug 2014, 09:03 AM IST
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