Japanese Sales Tax Hike Hammered Economic Growth Last Quarter

February 17, 2020

The Japanese economy again contracted sharply after a hike in the national sales tax. This is a phenomenon with lots of history. A 3% sales tax was introduced initially in April 1989. Back then, Japan was viewed like China is currently — an up-and-coming economic rival that could soon overtake the United States. The sales tax hike of 1989 reinforced inflationary forces. The Bank of Japan over-reacted to that development, the stock market peaked on the final business day of 1989 at 38,916, 65% above its present level, and economic growth in Japan has been coping with stagflation ever since. After hiking the sales tax in April 1997 to 5% from 3%, real GDP declined 2.7% at an annualized quarter-on-quarter rate (SAAR) in 2Q97, led by a 9.5% plunge (SAAR) in personal consumption, and after the tax was raised to 8% on April 1, 2014, GDP and consumption dropped 7.4% SAAR and 18.0% SAAR.

After twice postponing another tax hike to 10%, that move happened last October 1st. Initially, Japanese officials claimed initially that the impact on growth appeared comparatively muted, but today’s first formal estimate of Japanese growth last year revealed a 6.3% annualized drop in real GDP compared to the third-quarter level. Among components of demand, personal consumption, residential investment, non-residential business spending, and imports respectively plunged 11.0%, 10.4%, 14.1%, and 10.1% SAAR. Real GDP had only expanded 0.5% SAAR in the third quarter and recorded an average gain in 2019 of 0.7% after 0.3% in 2018. Compared to 4Q18, real GDP was in the red by 0.4%, and the economy contracted 0.7% over the two years between the final quarters of 2017 and 2019.

The GDP price deflator increased last quarter by 0.4% annualized compared to the third quarter and by 1.3% relative to its year-earlier level. Among components of real aggregate demand, personal consumption and business investment together exerted a drag on GDP growth of 9.0 percentage points. Net exports, inventories, and public-sector spending mitigated the quarterly drop in real GDP by 1.8 percentage points, 0.5 percentage points, and 0.4 percentage points, respectively.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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