August 29,2014,18.00 JST

Data shows Japan may be in recession

Most of the data published today (August 29th) point to a stagnation in the economic activities in Japan. The recovery in the private consumption halted in July. After a seasonal adjustment, retail sales shrunk by 0.5% in July from the previous month. Household Survey reported a shocking 5.9% year on year decline in the real consumption in July. 


 Source: METI, JMA


The news on the labor market was not bright either. The unemployment rate rose for the second consecutive month in July to 3.8%. A rise in the unemployment rate is not necessarily a bad news for Japan as Japan is now close to a full-employment status and a labor shortage can also cripple the economy. But the consecutive rises in the unemployment rate are at least signs of a weakening in the demand for labor after the tax hike in April. The manufacturing activity was also dismal in July. After declining by 3.4% month on month in June, the industrial production only managed to expand by 0.2% in July. Judging by the weak recovery in July, it is now likely that the industrial production will record a decline in July-September quarter. If it does, it will put the manufacturing sector of Japan into a technical recession. 


 Source: METI, Cabinet Office, JMA


But stimulus measures unlikely till early 2015

Recession or not, it is fairly certain that the Japanese economy is suffering a period of weak growth after the sales tax hike and the weakness is persisting longer than initially expected by policy makers. Will policy makers respond with stimulus measures?


While they may voice soft concerns, they are unlikely to shell out hard stimulus measures for now. What is constraining them is the consumption tax rate hike issues. Prime Minister Abe is scheduled to formally decide in early December to raise consumption tax rate to 10% in October 2015. In our view, the decision is already made in favor of the hike some time ago but admitting a need for a stimulus measures now would bring the possibility of the cancellation of the tax hike back on the agenda. A cancellation of the tax hike will bring about a political upheaval and inconvenience to Prime Minister Abe, including a need to debate when to resume the hike in the national parliamentary election scheduled in the summer of 2016. In order to avoid cornering themselves into such situations, policy makers are unlikely to admit a need for stimulus measures until the consumption tax rate hike issue is settled and final, in early 2015.