Japan’s economic expansion cooled more than initially forecast in the second quarter, revised data showed, complicating the government’s planned consumption tax hike later this year.
Ironically, the long-delayed sales tax increase is expected to shrink Japan’s GDP output later this year, plunging the country closer to recession.
Japan GDP Revised Downward
Japan’s gross domestic product – the value of all goods and services produced in the economy – expanded 0.3% in the second quarter, the country’s Cabinet Office confirmed Monday. That translated into an annualized growth rate of 1.3%.
Preliminary data last month showed the economy expanded 0.4% in the second quarter and 1.8% year-over-year. Both figures were higher than expected.
Strong domestic demand, fueled by a ten-day holiday that boosted spending on services and consumer goods, underpinned the economy’s performance last quarter.
While Japan’s growth pace doesn’t put it anywhere near the upper echelons of advanced industrialized nations, it’s fairly robust given the current state of global economic affairs. The major concern heading into the Q2 GDP report was Japan’s vulnerability to the U.S.-China trade war.
Since the 1990s, exports have made up an ever-increasing share of Japan’s GDP. By 2017, exports of goods and services made up nearly 18% of the nation’s economic output, according to World Bank data.
Still, Japan has not been immune to the trade war. Exports have declined eight straight months through July, with shipments to China falling hard.
Japanese Brace for Tax Hike
The latest GDP report has direct implications on Japan’s long-awaited consumption tax increase, which is scheduled for October. The planned hike, from 8% to 10%, has been pushed back twice already amid fears that the economy was sliding into recession.
Prime Minister Shinzo Abe’s government raised the sales tax back in 2014 with painful results. Now, analysts are debating to what extent the 2014 downturn will repeat following the new tax hike. According to the Japan Times, there’s also a great deal of confusion about which items will be subject to the higher tax burden and which will receive preferential rates.
A repeat of 2014 would certainly put the Bank of Japan (BOJ) in a bind. The leader in ultra-loose monetary policy is under renewed pressure to reduce constraints even further in light of the global economic slowdown. But the BOJ has already made record asset purchases and cut interest rates below zero. Some analysts fear that another round of quantitative and qualitative easing would undermine financial stability in the world’s third-largest economy.