• Wed
  • Nov 26, 2014
  • Updated: 8:57pm
BusinessEconomy
Japan Economy

Japan consumer spending, factory output skid after rise in sales tax

Households cut purchases by 4.6pc after April sales tax increase, with industrial production falling 2.5pc, putting pressure on monetary policy

PUBLISHED : Friday, 30 May, 2014, 11:57am
UPDATED : Friday, 30 May, 2014, 11:49pm

Japan's household spending fell at the fastest rate in three years last month in a sign that consumption could be slow to recover from an increase in the nationwide sales tax, raising questions over the pace of economic recovery.

Industrial production fell more than expected as companies cut output to avoid a pile-up in inventories in the lull after the sales tax rise took effect.

Bank of Japan officials have said they are confident spending will quickly recover as the labour market remains tight, but the bigger-than-expected spending drop and a slowdown in factory activity could raise the stakes for monetary policy.

"Spending will recover from May, but sales of durable goods look weak and this could be a drag on overall spending," said Hidenobu Tokuda, senior economist at Mizuho Research Institute. "The government can afford to let the spending in its stimulus package run its course. The Bank of Japan doesn't need to move now, but it needs to keep an eye on the situation."

Household spending fell 4.6 per cent from a year ago, more than the median market forecast for a 3.2 per cent annual decline. That marked the fastest annual decline since March 2011, when an exceptionally powerful earthquake and tsunami triggered a nuclear disaster.

Compared with the previous month, spending tumbled by a record 13.3 per cent in April, more than the 13 per cent decline expected by economists.

Government data published with the new figures shows that household spending fell further after the April 1 sales tax increase than it did after the 3 per cent sales tax was imposed in 1989, and when the tax was raised to 5 per cent in 1997.

Nationwide consumer prices showed that inflation picked up in April, excluding the April 1 sales tax rise - a welcome sign in the Bank of Japan's battle to bring inflation to 2 per cent. Core consumer prices jumped 3.2 per cent in April from a year earlier, the fastest gain since February 1991, as the sales tax increase boosted prices across the board.

The increase in the core consumer price index, which excludes volatile fresh food prices but includes oil products, compared with economists' median estimate for a 3.1 per cent rise, the Ministry of Internal Affairs and Communications said.

The Bank of Japan estimates that the sales tax rise will add 1.7 percentage points to Japan's annual consumer inflation in April and 2 points the following month.

Summer bonus payments in June could help support consumer spending, but there are lingering concerns that declines in real wages will weigh on consumption in the medium term.

The government raised the sales tax on April 1 to pay for rising welfare costs. A second tax increase to 10 per cent is scheduled for October next year. Excluding the tax increase, inflation accelerated from the 1.3 per cent level in the previous month.

Industrial output fell 2.5 per cent in April, more than a median market forecast of a 2 per cent fall.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 1.7 per cent in May and decline 2 per cent in June.

In separate data, the jobless rate held steady at 3.6 per cent in April.

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