Japan’s Economy Contracts after Tax Hike

Japan’s economy suffered the sharpest contraction since the March 2011 earthquake and tsunami disaster in the second quarter of this year.

Figures for Q214 show that Japanese gross domestic product (GDP) shrank at an annual rate of 6.8% and was 1.7% lower than in the previous quarter. Growth of 1.5% was reported in Q114, when the economy was growing at an annualised rate of 6.1%.

However, the fall in Q2 had been expected as a sales tax increase impacted on household and corporate spending. In April the government in April raised the consumption tax from 5% to 8% as a measure to deal with Japan’s massive public debt.

The Japanese government is also confident that the world’s third largest economy will regain momentum later in the year.

In a statement issued after the GDP release, economics minister Akira Amari said: “Looking at monthly data during April-June, sales of electronics goods and those at department stores are picking up after falling sharply in April.

“The jobs market is also improving steadily. Taking these into account, Japan’s economy continues to recover moderately as a trend and the effect of the sales tax hike is subsiding.”

Nonetheless, there have been concerns that the tax hike would threaten the limited growth achieved by prime minister Shinzo Abe’s so-called ‘Abenomics’ strategy.

The policy has involved massive monetary easing, increasing the money supply to fight deflation and help exporters.

The government must decide now whether further monetary easing is needed, especially if the economy does not rebound in Q3. It may also reconsider plans to follow up the tax hike next year with a further increase.

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