The third largest economy surpassed the expected growth in the first quarter of 2016 after strong private consumption and upbeat export data, in contrast with the upcoming decision of Prime Minister Shinzo Abe regarding the sales tax increase.
Based on the report released by the Cabinet Office, GDP growth of the Japanese economy went up 0.4 percent in the first quarter, going beyond the expectation of the market. Moreover, the private consumption climbed by 0.5 percent, supported by the strong spending on food, beverage, televisions and recreation, while the public demand rose 2.6 percent.
On the other hand, spending on housing and business investment slid from January to March.The exports climbed 0.6 percent while the imports dropped for the second time around.
Prime Minister Shinzo Abe, who is going to host the Group of Seven Leaders summit, is expected to make a decision regarding the consumption tax hike for April 2017 and indicate fiscal policies related to the Abenomics 2.0 program.
In 2015, the minister modified his own economic platform. The focus changed from aggressive monetary easing, structural reforms and high public spending to support for child care, improved social security and emphasis on a stronger economy.
The plan of the minister to implement a rate hike could worsen the state of Japan’s economy as the debt pile of the country has been increasing. For the record, Japan experienced a sales tax hike from 5 percent to 8 percent in 2014 and the economy faced downfall in two-quarter recession during the same year.
Here’s the catch: most of the consumers in Japan probably won’t spend much with a higher tax. The minister should see some economic considerations before his final decision. In a recent survey, around 14 percent of Japanese bond investors believed that the reported hike will go as planned and the coming elections in June and July are just some of the factors to be considered.
An economist believed that consumer spending made a solid contribution to growth in the first quarter, but weak business and residential investment prevented Japan’s economy from reaching escape velocity.
Before May ends, the government is believed to send economic measures to reinforce the policy targets such as increasing the birth rate and the nominal gross domestic product of Japan. During the first quarter, the government consumption increased 0.7 percent and the public fixed investment climbed 0.3 percent.
The risks involved on the emerging economies, the volatile financial market and the impact of the earthquake must be taken into consideration to sustain the economic growth. Additionally, the economy of China staying narrow and the moderate growth in the U.S. could be some of the external factors.
The decision of the minister would play a crucial part in the recent trend of the economy. To be safe, the prime minister should delay the planned sales tax hike in 2017 and focus on pulling out additional stimulus. Further, the government of Japan should implement flexible policies to support the recovery of the economy.