Japan’s factory output, consumer spending and real wages all fell in August, offering fresh signs of an economy reeling under the hammer-blow of a sales tax hike and keeping pressure on policymakers to deliver more stimulus to revive growth.
Although the Bank of Japan is in no mood to deploy additional easing anytime soon, a run of soft data is raising doubts about the central bank’s conviction that inflation will reach its 2% goal by around mid-2015.
Yesterday, policymakers received another sobering reminder of the enduring impact on the economy from the April 1 sales tax hike to 8% from 5% – a move meant to curb Tokyo’s swollen debt.
Household spending fell 4.7% in August from a year earlier, the fifth-straight month of declines, and weaker than a 3.8% drop forecast in a Reuters poll, data showed. The drop should not come as a surprise as Japan’s real wages fell at a faster annual rate in August, separate data showed, in a discouraging sign that consumption may remain weak as salary gains fail to keep pace with inflation.
Economy Minister Akira Amari acknowledged the economy’s struggles, but stopped short of conceding that more stimulus was needed.
“I have to admit that there has been some trouble in recovering from the decline in demand after the April sales tax hike,” he said. “The economy has not developed as I had hoped … however, I still expect that the trend will point to economic recovery.”
However, many private sector analysts doubt that the economy would be able to rebound solidly after the tax hike drove it to its worst slump since the global financial crisis in the second quarter.
They say a fresh round of easing by the BoJ in coming months is a distinct possibility. The government may also be forced to compile a stimulus package if weakness persists.
Prime Minister Shinzo Abe must also decide by year-end whether to proceed with a second sales tax hike planned for late next year.
“Contrary to the BoJ’s view that output is rising as a trend, production is pretty sluggish. The economy won’t see a clear pick-up for the rest of this year,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“The government must compile quite a big fiscal stimulus package to revive the economy if it were to proceed with the second stage of the sales tax hike,” he said.
Investors responded to the drum roll of weak data by pushing the benchmark Nikkei share average down 1.1%.
The one bright spot came in data showing the jobless rate fell in August, while the availability of jobs stayed at a 22-year high, suggesting that improvements in the job market will ease some of the pain on households.
Still, it’s unlikely to be sufficient on its own to underwrite a solid rebound in the economy, especially as the much anticipated virtuous circle of higher income, consumption and investment spurring stronger growth and prices seems as elusive as ever.
To that extent, the BoJ’s key tankan corporate survey, due today, will be closely scrutinised by central bankers ahead of a rate-setting meeting next week, analysts say.
The headline index for large manufacturers in the BoJ tankan is viewed as a leading gauge of economic growth, while capital spending plans offer clues on the strength of business activity.
Factory output released by the trade ministry reflected the struggles faced by companies, which have been saddled with high inventories due to weak demand both at home and abroad.
Industrial output fell 1.5% in August to the lowest level since June 2013, as hopes for solid bounce remained elusive after the post-tax hike slump, the data showed.
Manufacturers surveyed by the ministry expect output to rise 6% in September but decrease 0.2% in October. Factory output would mark a second straight quarter of drops in July-September even if output grew as expected this month, ministry officials said. HSBC economist Izumi Devalier said in a research note that the weak output data will make it difficult for the government to go ahead with the second stage of its tax hike. “Our base case is that the government will proceed with the next VAT hike, as scheduled, but offset its negative impact with another round of large-scale fiscal stimulus.”