The increase of sales tax in Japan has triggered an abrupt fall in consumer spending in the last quarter, which has consequently lead to an economic contraction that hasn’t been seen since the earthquake and tsunami more than three years ago. The annualized 6.8% decline in GDP reported by the government in a preliminary estimate on Wednesday, was relatively mild compare to the latest market forecasts but still far more severe than what most experts had predicted when the tax rise originally took effect in April.
Shinzo Abe, the prime minister, took office in late 2012, and promised to rejuvenate Japan’s economy with his program of “Abenomics”. The GDP decline could be analyzed keeping in mind the similar sized jump in the first quarter, and some may even call it a statistical anomaly.
Changes in spending patterns were noticed as many moved expensive purchases forward and stockpiled daily items. However, the point of importance here is that, the contraction was more significant than the earlier gain. Growth from January to March was revised in Wednesday’s report from 6.7% to 6.1% while the government also said that it had reason to believe that the economy had shrunk slightly in the final quarter of 2013.
Mr. Abe should understand that it is imperative to address the tax issue again soon, he needs to decide whether to let it increase or if the economy is too fragile. The dominant opinion among the experts regarding the current quarter is that the economic activity has picked up and data for this period is due for release in November, and is one of the biggest considerations in Abe’s decision.
Japan’s public debt is the largest in the world which makes raising revenue crucial for the government and the sales tax is still much lower than that of other wealthy, developed countries.
However, it must be noted that the previous time tax was increase in 1997, the economy suffered greatly and many critics and experts haven’t forgotten that. On the other hand, the government argues that it was the Asian currency crisis and not the tax increase that caused the crash while the critics still remain unconvinced.
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