The revised Gross Domestic Product data proved that the previous Aprils sales tax hike had in fact hit Japan more strongly than was expected. The data clarified that the Japanese economy had actually slumped by 1.9 percent and not 1.6 percent, which was the predicted number. These statistics prove that Abe and the Bank of Japan have a gigantic task ahead of them - pulling Japan out of deflation is not going to be easy.
Japan is about to witness a snap election this coming Sunday. Abe and his supporters firmly believe that the induced delay in the sales-tax hike combined with stimulus policies will win him voters. Media houses have already predicted a victory for Abe's coalition.
Stuart Poulson Head of Corporate Trading with Tokyo and Toronto based Nikko-Desjardins Asset Management says:
“A mediocre hike in wages will impact private consumption and economic activity in a negative way. What's worse is that manufacturers, too, are getting anxious. This has led to a slump on the production side as well.”
A decline in business investment is driving these negative changes in the Japanese economy and has led the GDP to decline. Whereas analysts believed that business investment will fall by 0.2 percent, it actually went down by 0.4 percent.
The initial survey sample base did not include small businesses which have been witnessing fragile spending. The inclusion of these small businesses further pushed down the revised GDP figures.
In April, the Japanese government hiked the sales tax from 5 percent to 8 percent. The sales tax was hiked to create a fiscal stimulus and facilitate structural reforms. However, the tax hike hit the economy negatively by reducing the overall household spending. 'Abenomics' already has fingers pointing towards Prime Minister Shinzo Abe.
GOVERNMENT IS FACING POLICY CHALLENGES
Policies based on 'Abenomics' actually delivered results in the start. Initial measures taken by Abe and his cabinet weakened the Yen and promoted investment. This led to a growth in the household income and business investment. It also increased stock prices of important players. And thus, despite two quarters of slow down, Japan's economy is still doing better than what it was back in 2012 when Abe took oath as the country's Prime Minister.
More recently, when Abe pushed the second tax hike (which will bring the country's sale tax to 10%) to 2017, he broadened the scope for consumer spending which makes 60% of the total GDP.
However, the technical recession that Japan is facing has also proved that Abe and his cabinet must take more actions and introduce more effective stimulus policies to drag Japan out of deflation.
Mr. Poulson says:
“The government has been in office for two years now and yet, wage hikes and capital spending have only been mediocre.”
The monthly Reuters Tankan registered weakened business interest. The Reuters Tankan survey has also predicted a decline during the fourth quarter. This is a sign of concern, especially for the Bank of Japan.
In April last year, the Bank of Japan induced a massive stimulus to bring inflation to the targeted 2 percent. The Bank further pushed this stimulus in October. However, the Tankan survey's results have caused anxiousness among analysts.
If these policies do not fare well during the BOJ tankan survey scheduled to take place on December, 15, it would mean that the bank's stimulus program hasn't done well. In such a scenario, the BOJ may come under pressure to expand its stimulus again.
However, it is assumed that the BOJ will not change its policies and instead, will encourage its idea of a buoyant economy during its next meeting which is scheduled to happen on December, 19.
Many economists including Mr. Poulson are of the opinion that Japan's economy will regain momentum during this quarter. Households and businesses are slowly recovering from the last sales tax hike. The consumption has shown signs of recovery. Likewise, exports are also likely to register an increase during this quarter. This is a sign of relief as exports have remained largely low even after Yen going down against the Dollar.
Source
Stuart Poulson – Nikko-Desjardins Asset Management
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Established in 2006, Nikko-Desjardins Asset Management is an independent, full-service brokerage, wealth management and business management provider dedicated to providing wealth preservation solutions from Asia to North America for affluent individuals, families and Institutions.
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