Japan: Positive Data Boost Case for Tax Hike

Consensus Forecasts

The final release of Q2 GDP (on our deadline) indicated that a solid economic recovery is taking hold, after the preliminary figure of 0.6% (q-o-q) was revised up to 0.9%. On a y-o-y basis, GDP growth improved to 1.3% from the previous estimate of 0.9%, reinforcing the case for Prime Minister Abe to go ahead with next year’s planned consumption tax hike – a move necessary to cut Japan’s soaring public debt. The final GDP release came after the September 5 monetary policy meeting where the Bank of Japan governor signalled his support for the tax increase. He deemed the economy to be “recovering moderately” and hinted at the prospect of further monetary easing should the VAT hike weigh on prices and economic activity. The day after the meeting, the government upgraded its overall economic view thanks to strong manufacturing-related numbers. Industrial output rose 3.2% (m-o-m) in July following a similarly sized decline in June (-3.1%), while the purchasing manager’s survey for August manufacturing improved to 52.2 from 50.7 in July. Other monthly economic indicators proved more disappointing, though. July retail sales dropped 1.8% (m-o-m) after a 0.2% decline the month before, although bad weather and fewer calendar days may have affected the outturn, too. In addition, an improvement in the labour market (July unemployment stood at 3.8%, the lowest since October 2008) and an increase in summer bonuses should support consumption. With these data releases in mind, the prime minister is due to finalise his decision on the tax hike next month.

Total core CPI accelerated at its fastest pace since November 2008 in July to 0.7% (y-o-y), although our panel has left its 2013 forecast for overall inflation unchanged this month.

You can download a sample of Consensus Forecasts G-7 and Western Europe at www.consensuseconomics.com.

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