Japan's economy has reported its sharpest contraction since the tsunami struck in 2011, after a controversial sales tax hike dampened consumer spending. But all may not be lost just yet for prime minister Shinzō Abe and his economic reform plan.
In April 2014, Japan raised its consumption tax for the first time in 17 years, from 5% to 8%, in a bid to try and improve the economy and get to grips with national debt.
The tax is only set to rise again, with October 2015 mooted as the date where it will be raised once more, settling at 10%.
It was described as a “necessary action” by the Japanese Prime Minister Shinzo Abe, as he tried to kick-start the country’s faltering economy.
Some four months on since the historic rise, it has been reported that the Japanese economy has contracted by 6.8% during the second quarter of 2014, marking the most notable fall since 2011, when the country was critically impacted by natural disasters.
Initially, the sales tax rise has caused problems for the retail market, with private consumption down 5% in Q2 on the previous quarter. However, speaking to the BBC, Japan economist at Capital Economics, Marcel Thieliant, suggests the country could bounce back in the coming months.
A controversial measure to double Japan's sales tax from 5% to 10% is seen as key to the success of Shinzo Abe's economic reform plan. Photo: Shutterstock
It seems that consumers, anticipating the April tax rises, decided to spend their money earlier to make the most of their funds. This led to a lull in sales activity in the following few months.
While retailers and commercial sellers might be feeling the pinch at the moment, it seems confidence is high in the recovery stakes and they may not suffer for too much longer.
However, Bloomberg reports that major retailers Apple and Amazon saw major decreases in sales in the second quarter. Furthermore, luxury goods firm LVMH Moet Hennessy Louis Vuitton saw an 11% fall in one of its segments in Japan.
Is it the larger retailers that are really starting to feel the effects of the tax increase, or is this spreading across the wider market?
There are indeed some positives in the bigger picture for businesses in Japan. In fact, it seems the jobs market is steadily improving in the country, with the economy in the midst of a repair.
With the sales tax coming into effect, there was obviously going to be a surge in spending before a marked drop, which is probably what we have seen in the falling figures from quarter two.
But retailers, especially the global corporations, should not yet give up on Japan. Despite the tax rise being perceived to be a harsh move, it seems that not only was it necessary, but that it is actually working to restabilise the Japanese economy.
Despite the larger firms reporting the most prominent fall in sales following the sales tax rises, that isn’t to say it didn’t have an impact on the smaller businesses, too. However, regardless of who suffered most, it seems that this won’t endure.
Indeed, with the sales blip in quarter two coming after heavy spending in the previous four months, it might prove that quarter three’s figures are much more heartening.
Speaking to City A.M., Genzo Kimura, an economist at Sumitomo Mitsui Trust Bank, suggested 2014 could be more subdued than the year before, but strong growth, rising equity prices and private investment could yet firm up: Predictions that should be welcomed by Apple and Amazon alike.