September 8,2014,11.00 JST

Policy makers to keep happy faces despite the unsettling GDP number

 Source: Cabinet Office, JMA.

In the second preliminary estimates published on September 8, the Japanese economy is reported to have shrunk by 1.8% quarter on quarter (qoq), or by 7.1% on an annualized basis in the April-June quarter. The estimate is a slight downward revision from the first estimate published on August 13 that calculated the shrinkage to be 1.7% qoq. 

The main reason for the change between the first and second estimate is the downward revision in the private capital expenditure. It was initially estimated to have shrunk by 2.5% qoq, and now re-estimated to have shrunk by 5.1% qoq. 

The overriding factor for the shrinkage in the economy in the April-June quarter remained unchanged between the first and the second preliminary estimate. It was the sudden slump in private consumption, a decline of 5.1% qoq, that brought down the Japanese economy in the quarter. After the sales tax hike to 8% this April, consumers sharply pulled back from their spending. 

A contraction in the economy after the sales tax hike was virtually unavoidable, but the size of the decline is bigger than many government officials expected. In late July, the Japanese government revised down their growth forecast for the fiscal year 2014 from 1.4% to 1.2%. They will have to cut their forecast again, judging by the weak GDP growth in the April-June quarter. In order for the Japanese economy to meet the current government outlook, Japan needs to keep growing at the annualized pace of 4.5% for the remaining 3 quarters. In our view, that seems highly unlikely. We (Japan Macro Advisors) forecast zero growth for the fiscal year 2014.

Policy stimulus actions will have to wait till early 2015

In the light of weak economic data received so far, not just of April-June, but also of July and August, we suspect that policy makers are starting to be worried. However, they are unlikely to take stimulus actions until early next year. Why? It is because they cannot voice explicit concerns on the economy until the 2015 consumption tax rate hike is settled. Prime Minister Abe is scheduled to decide on the tax rate hike by December this year. If policy makers are to start discussing adopting stimulus measures, the first argument they may face is "why not cancel the consumption tax rate hike in 2015?". In order to avoid this question, policy makers are likely to maintain happy faces until the hike becomes final in the FY2015 budget. In a press conference on September 5, BoJ governor Kuroda supported the tax hike and said the negative impact from the tax hike can be dealt with by monetary and fiscal stimulus. It seems that the course of actions will be to raise the consumption tax no matter what and deal with the consequence later. In our view, it is tremendously hard to change the direction of the economy once it starts to go south, but that seems to be the risk Japanese policy makers are willing to take to make the consumption tax rate hike final.

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