Japan -The persistent impact of VAT rate hike is a drag for growth

The Japanese GDP has retreated during the second quarter. It was down by -1.6% (annual rate) after +4.5% during the first three months of the year. Compared to last year, economic activity is up at 0.7% and carry over growth is at 0.4% for 2015 (carry over is the average growth for 2015 if GDP remains at Q2 level for the rest of the year).
The GDP profile is shown on the graph. I have added a trend calculated from 2000 to 2008 (in red). The main point to notice is the fact that the GDP in Q2 is at the same level than during the last quarter of 2013. The Japanese economy stagnates even with a very accommodative monetary policy. But fiscal policy has been brutal with the VAT rate hike (3 points) on April 2014. The impact is persistent and has dramatically changed the upward trend of the Japanese economy. Continue reading

3 graphs on the Japanese recession

The Japanese economy is back into recession. After the deep drop of the second quarter due to the VAT rate hike on April the first, the negative momentum has not been reversed. (see chart 1).
GDP dropped by -1.6% at annual rate in the third quarter after -7.3% during the second quarter. Compared to Q3 2013 GDP is down by -1.1%. Carry over growth for 2014 is still positive but by a mere 0.2%.
It seems that Shinzo Abe has postponed the second VAT rate hike that was scheduled for October 2015. He is right as in a very weak global environment, the Japanese economy will have to find resources in itself to converge to a growth trajectory. A new negative shock is not necessary.
It will be complicated for Japan to escape to a long recession. From my point of view, we can expect a recession of several quarters. In 1997 after the VAT rate hike, the shock was milder than the current one but the recession lasted 5 quarters.
The very accommodative monetary policy can help to recover. Weaker yen and negative real interest rates will help.
In details (see 2nd graph), there was a small rebound in consumption during the third quarter (+1.5% annual rate) after -18.6% during Q2. Investment was down again in the third quarter: -2.2% after -16.6%. Due to a positive contribution from government expenditures, internal demand had a small positive contribution: +0.65% versus -14.7% in Q2. (see 3rd graph)
Net export has a positive contribution as exports regain a stronger momentum. But contribution from inventories was negative. Companies has accumulated inventories in Q2 but reverse the movement in Q3. That explains the fall into recession of the Japanese economy
Japan-2014-Q3-GDP-trendJapan-2014-q3-ContribJapan-2014-Q3-Int-Demand

Is Japan recovering from the VAT rate hike of April the 1st? Clearly it doesn’t

Is Japan recovering from the VAT rate hike of Avril the 1st? Not really when we look at July numbers on retail sales. (see here for a detailed analysis of Q2 GDP drop). Retail sales are down again in July and the current sales profile is clearly weaker than in 1997 during the previous VAT rate hike: sales were up in July 1997, down in 2014.
In 1997 the rate hike led a to a long recession. With a weaker dynamics the probability of a long recession is clearly above 50%. The drop in households purchasing power continues and in the absence of structural reforms there are no reasons for a rapid upturn. Continue reading

An Unprecedented Negative Shock on the Japanese Economy in the second quarter

I have already spoken a lot on VAT rate hike in Japan and the negative impact that this fiscal measure has had on the economic outlook (see here, here and here)
The negative GDP growth number for the second quarter was not a surprise. It dropped by -6.8% (at annual rate) after +6.1% during the first three months of this year. Compared to the second quarter of 2013 growth is at 0%. Carry over at the end of the first semester is 0.5% for 2014.

The first chart presents the Japanese GDP profile since 2000. The red line is a trend calculated from 2000 to Q2 2008. At the end of the second quarter of 2014 the gap between the GDP level and the trend is -8.7%. The GDP level is 8.7% below the trend. Continue reading

Japan – The negative impact of the higher VAT rate on sales can still be seen in May

The increase of the VAT rate on April the 1st was an important event in Japan but also for the world economy. The success or failure of the Abenomics was partly dependent on the impact of this increase on Japanese consumers’ behavior. We now have figures from department stores’ sales in May.
One month ago I did a first evaluation of the higher VAT rate on sales (here in French for department stores and here in English for retail sales). This post is an update.
In April department stores’ sales dropped dramatically after the VAT rate hike. March figures were strong in anticipation of this increase.
This dynamics was the same than in 1997 during the previous VAT increase.
Is there a difference in May? Continue reading

The Japanese Economy after the increase of the VAT Rate

The VAT increase on April the 1st has had a strong and negative impact on the Japanese economy. The inflation rate spiked to 3.4%, households’ purchasing power dropped dramatically and retail sales collapsed. On the manufacturing production side, the decline was significant.
These are mechanical effects of the higher VAT rate and this is a negative and persistent shock for the economy. In 1997 with already a VAT shock, the retail sales profile was the same than now and showed strong persistence. The impact was not only perceived in April but all along the year. Loss in purchasing power (see chart below) will not be reduced spontaneously and it is the trigger of this persistence. Continue reading