Gross domestic product shrank an annualized 6.8 percent in the three months through June, the Cabinet Office said. That was less than the median estimate of 37 economists surveyed by Bloomberg News for a 7 percent drop. Unadjusted for price changes, GDP declined 0.4 percent.
“The probability is high that the July-September quarter will see a rebound,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “But the fall in real incomes and weakness in production could weigh on the recovery.”
The contraction followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose. Abe is striving to sustain a recovery after initial success in fighting off two decades of economic stagnation.
Household consumption plummeted at an annualized pace of 19.2 percent from the previous quarter, while private investment sank 9.7 percent, highlighting the damage to demand by the 3 percentage point increase in the levy.
The higher sales tax hit consumers who’ve seen little growth in incomes and rising costs of living as the Bank of Japan stokes inflation with unprecedented easing. Consumer prices rose 3.6 percent in June from a year earlier -- nine times the increase in total cash earnings -- with food prices climbing 5.1 percent.
Imports tumbled an annualized 20.5 percent while exports fell 1.8 percent. That’s sapping the manufacturing sector and shows the yen’s 16 percent drop against the dollar over Abe’s term has yet to drive outbound shipments.
The windfall in corporate profits that the weaker yen delivered to many Japanese manufacturers last year also shows signs of fading.
“Price increases are spreading,” said Koya Miyamae, senior economist at SMBC Nikko Securities Inc. in Tokyo. “It’s highly likely the government will declare Japan is out of deflation this year before making a decision on the next sales-tax hike.”
Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today's Q2 GDP collapse of 6.8% annualized is an utter disaster (even if it is slightly better than the expected -7.0% expectations thanks to a surge in the deflator). Inventory additions added 1.0% growth. Consumer Spending collapsed 5.2% QoQ - the most on record. Of course, in the traditional of Keynesian hockey-sticks, this XX% collapse in Q2 is expected to surge back to a 2.5% growth figure in Q3 and lead Japan to the holy grail once more.. only it didn't quite work out that way last time for Japan. Simply put this is the worst posible outcome for bulls, small beat not enopugh to rejuice QQE. As a gentle reminder of just what happened in 1997 - the last time Japan hiked taxes- we provide the eerily analog chart below...
Japanese GDP growth was almost twice as bad as the last time Jap[an hiked its taxes...
As Consumer Spending collapsed...
Here come the hockey-sticks...
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Let's hope the last 10 months was just coincidentally 90% correlated to 1997!!