Magic Disappeared

The impact of consumption tax hike was far greater than Abe administration supposed. The Cabinet Office released the statistic of gross domestic products of Japan in the second quarter of this year on Wednesday, which shrank 1.7% and marked annualized fall by 6.8%. It is undeniable that raising consumption tax rate on April 1^st, from 5% to 8%, abruptly cooled Japanese economy down. Key to the recovery is obviously the growth policy led by Prime Minister, Shinzo Abe. However, more and more people in Japan came to acknowledge that his economic policy made no difference from old-fashioned economic policy of Liberal Democratic Party. Japanese economy is getting out of the magic of Abenomics.

The slump emerged in the second quarter was the worst after the first quarter of 2011, when the Great East Japan Earthquake occurred that marked annualized fall of 6.9%. Personal consumption fell by 5.0% from the previous quarter, the first down in last seven quarters. Experts attributed that big fall to hasted demand before new tax rate. But investment in housings showed 10.3% of down, emphasizing negative mind of consumers on expensive purchase.

Main reason for consumers to be reluctant in purchasing was high price of raw materials along with higher oil price. However, economic policy taken by Abe administration is raising commodity price. Regardless still low level of wage, its monetary policy stays in introducing inflation. It is reasonable tendency for consumers not to buy as many things as in the time before the tax rate was raised.

Abe administration is looking into cultivating potentiality of women and regional community. For national budget next fiscal year, the administration is considering policy support for working women and subsidy for local governments. However, history showed that money distribution would not work as stimulus at large. It is obvious that Abe is going to lean on investing less effective infrastructure, following requirement of LDP lawmakers.

The slump will definitely affect Abe’s decision of raising consumption tax rate again. He is determining whether doing that by the end of this year. Optimistic experts predict that he will decide it, because the slump will be eased in the third quarter. But, in the circumstance that 8% of sales tax significantly cooled consumers mind down, next 10% tax may put crucial damage on Japanese economy.

As shown, Abe has many opportunities to make his popularity worse in this fall. This economic slump may lead to appeasement in other area, like lifting sanction toward North Korea in exchange of abductees, or getting into negotiation with China admitting existence of dispute over Senkaku Islands.