Japan suffers worst economic slump since 2011 'quake

Japan's economy likely contracted at a 7.1 percent annual rate from the previous three months as a sales-tax hike battered consumption. The poor economic performance for Japan may increase pressure on Prime Minister Shinzo Abe's administration to step up stimulus measures. 

Yuya Shino/Reuters/File
A woman looks at an item in front of a display shelf at a supermarket in Tokyo August 13, 2014. A sales tax hike last quarter drove Japan's economy into its biggest contraction since the March 2011 earthquake and tsunami, Cabinet Office data showed on Wednesday, keeping policymakers under pressure to expand fiscal and monetary stimulus should recovery falter again. REUTERS/Yuya Shino (JAPAN - Tags: BUSINESS POLITICS) :rel:d:bm:GF2EA8D0M9P01

Japan's economy likely shrank sharply in the second quarter, which would be bad news for Prime Minister Shinzo Abe's growth policies, but it could raise market expectations of further stimulus.

Data due at 8:50 a.m. Wednesday Japan time (2350 GMT on Tuesday) will show gross domestic product contracted at a 7.1 percent annual rate from the previous three months as a sales-tax hike battered consumption, economists forecast in a Reuters poll.

The deepest slide since the global financial crisis and the first in nearly two years could call into question Abe's program of ending 15 years of deflation and tepid growth with massive monetary easing, hefty government spending and structural reforms.

"It's going to be hard for the economy to regain momentum, given weak exports and a decline in real income, which weighs on private consumption," said Takeshi Minami, chief economist at the Norinchukin Research Institute.

"The economy will rebound in July-September but growth is likely to stay modest in October-December."

Markets are poised for a downside surprise, and investors in the near term could be cheered by a bad result if they think it puts pressure on the Bank of Japan to increase its asset purchases, or on Abe not to raise the sales tax again, market participants say.

"If GDP undershoots, the BOJ will likely be forced to change its assessment of consumption," said Naoki Murakami, market strategist at Alliance Bernstein Japan. "Even if this doesn't lead to a debate about immediate further easing, markets may seize on it in anticipation."

ECONOMISTS DOWNGRADE FORECASTS

The expected pullback from the tax hike - following a 6.7 percent first-quarter surge ahead of the new levy - comes even as Japanese companies have finally been able to start passing on higher labor and materials costs to consumers and other businesses.

Economists had been penciling in a roughly 5 percent April-June drop until recent data showed the weakest factory output since 2011 and a second surprise monthly drop in exports, confirming that the weakness in the world's third-biggest economy is widespread.

One quarter's GDP is unlikely to alter the policy debate alone, unless it is so bad that it derails the BOJ's baseline recovery scenario, economists say.

And BOJ Governor Haruhiko Kuroda has been relentlessly upbeat about Japan's outlook, even as private economists have become gloomier.

"Japan's economy is likely to continue recovering moderately with the effect (of the tax increase) seen gradually subsiding," Kuroda said on Friday, even as the central bank cut its assessment of exports and output.

As for the tax hike, Abe's government has said he will scrutinize July-September GDP and other data to make his decision around year-end on whether to proceed with a planned rise in the sales tax to 10 percent from eight percent.

Wednesday's forecast contraction is almost twice as steep as the 3.7 percent drop from 1997, the last time the sales tax was raised - a move that preceded a steep recession and ended the political career of Ryutaro Hashimoto, the premier who pushed through the tax increase in a bid to curb Japan's spiraling government debt.

But policymakers and many economists say a simple comparison with the previous hike is not easy, because that recession was greatly compounded by the Asian financial crisis. (Additional reporting and writing by William Mallard; Editing by Mike Collett-White)

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.