Japan’s GDP to grow as shoppers stock up ahead of planned tax hike

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TOKYO — After posting a faster-than-expected growth in the April-June quarter, the Japanese economy will continue to sail through July-September, private-sector economists predict, but an October consumption tax hike looks likely to snap the four-consecutive quarters of expansion.

The economy grew a seasonally adjusted 0.4% in the second quarter, according to preliminary reports released by the Cabinet Office on Friday. The figure translates to annualized 1.8% growth.

“Since the beginning of the year, concerns about a deceleration were growing quickly, but the economy seems to have escaped a crisis scenario,” said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research and Consulting.

Internal demand is driving the world’s third-biggest economy. Private consumption grew by 0.6% in the second quarter from the previous quarter as consumers loosened purse strings during summer vacation and the lengthy spring holiday for the changeover to the Reiwa era. Purchases of air conditioners, televisions and other durable items were healthy as well.

Fueled by solid personal spending and corporate investment, gross domestic product is on track to rise by 0.5% in the third quarter on an annualized basis, according to the average estimate of 17 economists.

As Japan inches closer to October, when the consumption tax rises to 10% from 8%, economy watchers expect an increase in last-minute purchases of large appliances and everyday goods.

Already such signs are emerging. When discount store chain Big-A cut prices by 10-20% on select daily necessities in mid-June, sales of detergents jumped more than 50% from a year earlier, and toilet paper surged 30%. Both are items of choice for people looking to stock up.

After the tax hike, however, retail consumption is expected to slow, weighing on the economy in the year’s last quarter. 

Consumer spending is expected to underpin Japan’s economic growth in the third quarter.   © Reuters

Dragged down by the tax hike, GDP will shrink by 2.5% on an annual scale in the fourth quarter, the economists predict. After the consumption tax was raised to 8% from 5% in 2014, the economy contracted by 7.2% due to a sharp drop-off in consumption.

To blunt the pain, the Japanese government is rolling out 2.3 trillion yen ($21.7 billion) in economic stimulus that includes tax breaks and customer reward points. The government is hoping that the impact of the 2-point tax increase will be smaller than in 2014, when the hike was 3 points.

“Even if the scale [of the tax increase] is limited compared to the last time, rushed purchases before the hike and a subsequent backslide will be inevitable,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

External demand is unlikely to help make up for the dropoff. Average predictions by the economists point to 0.1% growth in exports in the third quarter. 

At the start of this month, U.S. President Donald Trump announced an additional round of tariffs on Chinese exports taking effect on Sept. 1, intensifying the trade tensions.

Orders at Fanuc, the Japanese industrial robot maker, dropped roughly 20% on the year in the April-June quarter. “Since May, the trade frictions have gotten stronger, and now the trade war is widely expected to become drawn out,” said Fanuc President Kenji Yamaguchi. As for corporate capital spending, “the wait-and-see sentiment is becoming predominant,” he added.

Japanese exports to China are expected to fall off further in coming months, creating an obstacle for continued economic growth.

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