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Japan's economy shrinks 1.8% in April-June

42 Comments
By Miwa Suzuki

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Abe still got his head in the sand? Give him until end of Oct and he is replaced, someone needs to take the blame for this.

3 ( +7 / -4 )

Hooray for Abenomics.

5 ( +8 / -3 )

Japan deserves better than this. You can't spend your way to prosperity. Freedom is the way to prosperity. Unleash the genius of Japan.

7 ( +7 / -0 )

Here's a hint: If you tax a discretionary activity, then people will be discouraged and do less of it. Not all, but a large part of your personal spending, is discretionary, and taxing you whenever you buy something you don't really need to buy will cause most people to buy less of it or buy it less frequently. Since the economy depends on people spending money, it hurts the economy.

To contrast, earning an income is NOT discretionary, at least not for the vast majority of people. That's why progressive income taxes have worked so well in the past. The most glaring example is America in the 50's when the upper tax rates were quite high--but still represented real income gains for those people who were lucky enough to have those big incomes. Yes, I said "lucky" because there are plenty of people who work quite hard without the big incomes. There's a difference between the super-rich and the rest of us. They LOVE money MUCH more. Unfortunately, they suffer from an incurable problem. There is NO amount of money that will satisfy their desperate need for more money, no matter how many politicians they bribe.

0 ( +4 / -4 )

Japan’s economy slammed on the brakes as the country raised its sales tax for the first time in 17 years in April.

DOH........I hope someone would have Abe do the ice-bucket challenge with a load of bricks.

9 ( +10 / -1 )

As predicted, the obvious rush to beat the sales tax up to April that put spending way up hit a brick wall as soon as the tax hike came into effect. Who doubted this would happen, seriously? The irony is, any minute we're going to start hearing the big companies that profited from Abenomics and the government itself saying that we NEED the further tax increase because now the economy is doing worse than planned. Good old 'Abenomics'!

5 ( +11 / -6 )

The world's third largest economy? The world's third largest rip off is more like it! The government owes the people of Japan nearly double that of the next closest country, the US, and their plan to pay it back is by taxing the same people they owe the money to? The whole concept is just totally absurd! They put the sales tax up and did nothing to ensure more money was going into the pockets of consumers and wonder why spending has decreased? Good gravy! How foolish are these people?

7 ( +10 / -3 )

The economy was not really on the upswing before the tax hike. The only growth has come from increased borrowing (which there is no real plan to pay back) and yen repatriation from exporters, as well as a mild recovery from the earthquake. Yes, a lot of consumers bought items before the tax increase, then tightened their purses. Yes, the weaker yen fuelled the Nikkei, which is still down in 2014. Real wages have fallen for 13 months in a row now. Taxes and prices are higher so consumers have less money to spend. Abe's idiot plans depended on real wages rising, but that's not happening, and was never going to happen across the board. Abe was awful in 2006 and he's awful in 2014. His job is safe though as he will be re-elected by the rural elderly whatever he does.

6 ( +9 / -3 )

Disillusioned: The government owes the people of Japan nearly double that of the next closest country ...

I like the way you said it! Don't often hear it like that. But it says it all, and not just for Japan.

1 ( +1 / -0 )

"Hooray for Abenomics."

It's not due to Abenomics. It's due to the tax hike, which all the major parties had demanded and was in the works long before Abenomics.

As the story above states: "Prior to that, the economy had been on the upswing...."

Abenomics grew the economy. The tax hike is sinking it.

-2 ( +4 / -6 )

No shock here as taxing consumers only leads to them spending less on the things they don't 'need'. The more money you have, the more you tend to spend. That's not business 101 but simple human nature and whether it's your money or someone else's make little to no difference. This is why it is better to leave the money in the consumers' hands rather than place it into the government's where one can be sure it will almost always be wasted on crap you didn't need like that fugly sweater that so many seem to get for Christmas or birthdays.

1 ( +1 / -0 )

Reduce corporate tax, so they can take more risky investments. But, increase tax for wealthy individuals so they can't pay themselves bonuses from reduced corporation tax reported as "profit". Reduce workers tax, so they can actually buy stuffs. But, increase tax for luxurious goods, it's dumb that a Luis Vuitton is taxed the same rate as a pack of natto.

0 ( +1 / -1 )

Unleash the genius of Japan. LOL never happen while a people are taught to follow on not be independant & assertive. if the genius of Japan are held back because of cultural norms then your only as smart as the few at the top making the calls

2 ( +2 / -0 )

Abenomics grew the economy.

How so? If you are talking about pushing up the stock market by allowing companies to repurchase and leverage their own stock by borrowing money at the low rates set by the BOJ, then you are right, the economy grew. But if you are talking about sales, wages, or employment, these have all remained stagnant. Anyone here who has seen their wages increase, or cost of living decrease since Abe took office, please raise your hand.

Abe didn't have to approve the sales tax hike, no more than he has to approve the next hike. But he did, and he will, because doing so gives him a big pen to write more stimulus checks, which will be cashed in by his cronies, and paid for by us.

3 ( +5 / -2 )

the government is thought to be compiling an extra spending plan worth around 5 trillion yen as early as autumn

There is no valuable benefit from trying to paper over an initial downturn in economic activity by wasting even more money. It is what it is, just let it be.

You'd think with an excess of 1,000 trillion yen piled up already the government would have come to this realization, but then sense is not so common.

Anyone looking for Japan to find an easy way out of the mess it has created for itself over the past 20 years is most likely to be dissapointed. Japan needs to take it's medicine (in fact it needs some serious surgery) before things can ever look remotely rosy here. That debt the people have permitted the government to accumulate will cloud Japan for decades to come, and the longer necessary actions are delayed the worse it will be.

Disillusioned,

their plan to pay it back is by taxing the same people they owe the money to?

Well, it's not like Santa Claus was going to turn up with 1,000 trillion yen for the government to pay all the debt back with. Where else should the money should come from?

They put the sales tax up and did nothing to ensure more money was going into the pockets of consumers and wonder why spending has decreased?

No one ever doubted that the 2nd quarter numbers would be rubbish, after the sales tax. So it's still too early to jump to conclusions, IMHO.

But if Japan really can't raise tax revenues through sales tax hikes, then it's finances are irreparable. When the markets see that is when residents of Japan will start to see much bigger problems.

The alternative is slashing government spending, but who can find me 50% of the annual budget (50 trillion yen) to cut, so as to balance the budget? (That's before we even think about paying down the quad-rillion debt...)

-2 ( +1 / -3 )

sangetsu03, yes, absolutely, and add on that although DPJ under Noda proposed the tax hikes, they were already an LDP policy and Abe put the first one through to fund his "stimulus measures". Abe has achieved nothing other than increased debt and increased alienation from his main trading partners. He was a dreadful PM in 2006 and Taro Aso (his number 2) was the biggest joke of them all. How we have ended up with these two in charge of the country again is beyond me.

2 ( +5 / -3 )

To heck with the economy and people on fixed or shrinking income, the government is in debt up to its neck and needs more money to spend! Raise that tax to 10% next year and then to 15% by 2020!

0 ( +2 / -2 )

But, increase tax for luxurious goods, it's dumb that a Luis Vuitton is taxed the same rate as a pack of natto.

Most luxurious goods are taxed in the form of import tariffs, but an additional tax might not make a big difference in demand. A person that can afford to buy a LV bag will probably be willing to pay an additional 5-10% in tax.

I think we will still see economy retract, unless we see the yen strengthen again. Large Japanese corporations get the gains from the weaker yen, but are not necessarily raising salaries or creating new jobs. Sales are still sluggish so their poor performance is just being masked by the weaker yen.

A stronger yen reduces costs for many corporations that import goods/services. These companies can then offer lower prices to consumers which would result in more spending. This spending by consumers is what drives the economy.

0 ( +0 / -0 )

"Abenomics grew the economy.....How so?"

By expansionary fiscal and monetary policy. Then came the contraction policy: the tax hike. you cant do both at the same time.

"If you are talking about pushing up the stock market...."

Abe did not "push up" the market. Investors did. And investors represent a very wide swath of people and institutions, not just in Japan but worldwide.

"Where else should the money should come from?"

Higher GDP growth, which was starting to happen. but the tax hike is ruined that plan.

-6 ( +0 / -6 )

Reduce corporate tax, so they can take more risky investments.

Yes, but reducing corporate tax alone isn't enough. Abe needs to aim to make Japan the most business friendly environment in the world, and burning various other regulations is the most important area to look. That'll help enable corporations to make profits, then the tax rate will become more relevant.

But, increase tax for wealthy individuals so they can't pay themselves bonuses from reduced corporation tax reported as "profit".

The wealthy already have pretty high tax rates in Japan. If anything Japan could use more rich people than urging them to leave with such penalties.

Reduce workers tax, so they can actually buy stuffs.

Income tax for workers isn't that high in Japan, and workers would benefit most from an improvement in the business environment, through an increase in demand for their labour.

increase tax for luxurious goods

No thanks. Let's keep it simple. This is one of the few things that Japan does right. By keeping consumption tax simple, we need not legions of useless bureaucrats to deliberate on what goods and services ought to be taxed at what rates, and all the crony capitalism that would go on as a result of it. Japan has too much bureaucracy as it is without adding further layers of it.

1 ( +2 / -1 )

So - and this is without economical war with Russia ...

Just imagine - what happens than

0 ( +2 / -2 )

"Where else should the money should come from?"

Higher GDP growth, which was starting to happen. but the tax hike is ruined that plan.

I never saw any details of such a plan.

Realistically, what sort of GDP growth is achievable in Japan?

Would that growth be so stellar as to double tax revenues? And could it be sustained, year after year so as to bring the debt down to more manageable levels over time? Without seeing a rise in interest rates that'd push up debt servicing costs in the meantime?

Colour me skeptical.

0 ( +0 / -0 )

Abe did not "push up" the market. Investors did. And investors represent a very wide swath of people and institutions, not just in Japan but worldwide.

The BOJ is propping up the Japanese market just like the Fed is propping up the US market. The largest investors in the current economy are the companies themselves, with people and institutions just going along for the ride.

By expansionary fiscal and monetary policy. Then came the contraction policy: the tax hike. you cant do both at the same time.

This expansion of monetary and fiscal policy is the driving force behind the climb of the market. Since the government has anywhere from doubled to quadrupled the money supply, there is a glut of cash. To keep bond rates and debt servicing costs low, the government has pushed interest rates to almost zero. This has encouraged companies to issue debt, and with the capital they raise, they repurchase their own stocks, leveraging them, and driving up stock prices. This is one of the negative consequences of the above central bank policies, and it is likely to blow up in everyone's face.

Increasing the tax did not help, but Abe's policies before the tax hike were not responsible for any real growth in anything except debt.

3 ( +6 / -3 )

It should be piling on the pressure for him to fire his much touted (but obviously illusional) 3rd arrow. What will actually happen is BoJ will print vastly more yen to stoke inflation and manipulate exchange rate.

0 ( +1 / -1 )

fxgai - Well, it's not like Santa Claus was going to turn up with 1,000 trillion yen for the government to pay all the debt back with. Where else should the money should come from?

How about they start with cutting government spending? Stop pouring public funds into that ludicrous whale hunt in the southern ocean. Stop subsidising farmers and make them work for a living. Cut out all the middleware wit-men scalping funds from public works projects. There's a few trillion yen to start with!

3 ( +4 / -1 )

Kibousha's last sentence hit it perfect!

0 ( +0 / -0 )

t's not due to Abenomics. It's due to the tax hike, which all the major parties had demanded and was in the works long before Abenomics.

While doctrinally it might not be part of what supporters refer to as Abenomics, the fact is that this is a policy which was implemented by Abe and thus constitutes part of his economic policy.

0 ( +1 / -1 )

Disillusioned,

I'm very sympathetic to cutting government spending.

But in Japan's case they have already racked up so much debt it'll take years of concerted fiscal discipline to pay it down to sustainable levels.

And that's assuming they figure out a way to address the annual budget deficit of some tens of Trillions of yen which keeps adding to the pile. If it was just Billions of yen, then cutting a few whaling and white elephant programs here and there could be significant, but we are talking Trillions with a T. As someone else noted most of the extra spending is on health care etc to support the bulging aging population. So at the end of the day it's either slash that spending, or raise taxes. But I do agree that making an effort to cut waste could curry some favour with the public, even if by itself it wouldn't be anywhere near enough.

Boosting economic growth too would help, but again, alone I don't think that's going to cut it given the scale of the budget deficit, and the fact that Japan's population is shrinking.

2 ( +2 / -0 )

But, increase tax for wealthy individuals

One of the greatest lies told by politcians for the last several centuries is that it is possible to raise taxes on the rich to lighten the burdens of the poor. This flies in the face of even the elementary economics which even the simple can understand.

Think of the economy as a large pool of. The rich are in the deep end, the poor are in the shallow end. When you take a bucket of water out of the deep end, does the water level decrease at the deep end only? Of course not, the water level of the entire pool falls.

Let's say you raise the tax on the top income earners by 10%. What happens? The top income earners also tend to be the largest service providers, manufacturers, and employers. To compensate for the increase in tax, top earners can do seversal things, raise the prices of their goods and services, which means everything you and I buy becomes more expensive, they can reduce the number of their employees, or the pay and/or hours of their employees. In addition to this, top earners are also heavy consumers. When they consume less, the effect is felt strongly in the economy. The end effect is that any increase of taxes on top earners is spread throughout the economic pool.

The most glaring example is America in the 50's when the upper tax rates were quite high--but still represented real income gains for those people who were lucky enough to have those big incomes.

This is not the 1950's. Back in those days the rates were far higher than today, but so was the variety of deductable expenses. In addition to this, in those pen-and-paper, pay-for-it-in-cash days, it was quite easy to hide your income, and declare whatever you like. There were no computers keeping accurate records. Swiss bank accounts were quite popular in those days.

2 ( +2 / -0 )

"Anyone looking for Japan to find an easy way out of the mess it has created for itself over the past 20 years is most likely to be dissapointed. Japan needs to take it's medicine (in fact it needs some serious surgery) before things can ever look remotely rosy here. That debt the people have permitted the government to accumulate will cloud Japan for decades to come, and the longer necessary actions are delayed the worse it will be."

Very true. From my experiences in Japan, I would predict that things will start to get worse. I wanted to believe in Abenomics, but there is something missing in Japan that you can find abroad. That what is missing will not be replaced, therefore there cannot be any change. I see no change, and I havent seen any in a very long time. I dont think Japan is capable of the kind of change that other countries go through in order to revive their economy. For Japan, change means taking from the outside world, then changing it to become Japanese. This childsih mindset is not sustainable. Fareed said that Islamic countries have been stuck in the past due to their leaders, thus they are unable to change.. Same goes for Japan. They live in the past and wont accept the outside world. They take from the outside world, and modify that to fit Japan. I dont know of any other country that does this but its part of the reason they will soon be #4 and India, then somebody else, will take their place.

1 ( +2 / -1 )

On an annualised basis—if the performance was replicated over a 12-month period—GDP contracted 7.1%, compared with 6.8% in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.

Afraid that the elevator for Abenomics is heading to the basement, and all that will result from all this is a couple of years of false prosperity, and a pile of more debt. And 5petals is spot on in the reason why. Despite the "world-renowned" work ethic, Japan has lost its competitive edge, and will not change to meet the needs of a 21st-Century, global economy. Thirty plus years of LDP spending to keep things afloat have spoiled them. They now expect the government to bail them out, rather than their own efforts.

2 ( +3 / -1 )

t's not due to Abenomics. It's due to the tax hike, which all the major parties had demanded and was in the works long before Abenomics.

Dude you need to do some research, Abe made this a part of his economic recovery plan and HE is the one that decided to implement the tax hike. HE could have said NO, but HE decided it was in the best interest of the "government" not the people mind you, that the tax was increased.

Double DOH....

0 ( +1 / -1 )

@sangetsu03

"Since the government has anywhere from doubled to quadrupled the money supply, there is a glut of cash."

LOL. No it hasn't. It's up maybe 5% over the past couple of years. Nice try.

http://www.tradingeconomics.com/japan/money-supply-m2 http://www.tradingeconomics.com/japan/money-supply-m1 http://www.tradingeconomics.com/japan/money-supply-m0

As usual, you're conjuring up a slew of "non-facts" to support a delusional worldview and counter my argument, which is based on real facts and real-world events. Gee, I wonder who's right?

-1 ( +2 / -3 )

LOL. No it hasn't. It's up maybe 5% over the past couple of years. Nice try.

Sorry, mixed up America with Japan. America had $850 billion in the currency supply in 2008, it is $4 trillion now. Japan is following America's example, which will do them no good.

1 ( +3 / -2 )

I wanna know if Abe is still going to put up the consumption tax with the economy contracting notwithstanding. get ready for all the excuses in the world why we need a tax hike again, the tax will go up no matter what, short of an economic collapse

0 ( +0 / -0 )

The problem is that energy costs in Japan is over 9 percent higher and Food is over 4 percent higher than last year. Japan imports 60 percent of their food needs and 99 percent of her oil, and the yen exchange rate has more to do with higher cost at a wholesale and retail level than inflation. So when the Japanese politicians say Abenomics is well on its way to achieving its goals, they must mean of lowering living standards for all Japanese people.

1 ( +1 / -0 )

"Abe did not "push up" the market. Investors did. And investors represent a very wide swath of people and institutions, not just in Japan but worldwide. "

The investors are pulling back, due to Abes inability to persuade them that any reform will take place. They need something to push them over, not more of the same nationalist crap. It was just a bunch of hot air, just like the women he put into his cabinet. Woman or man, no change can take place if both are aligned with extreme rightist polices and ideals. That one is typical Japanese. More stimulus from Kuroda? You think that will bring them back?

So its the same ole recycled Japan style change. Change on their terms; anything painful or risk is to be avoided. Smoke and mirrors like this women cabinet change up.

-1 ( +0 / -1 )

I think change in Japan is possible.

It'll just take things to get worse first, before they can get better. There are reformist mind people about the place, but they need some sticks to beat the heads of those who want to stick with the status quo just a little longer. That includes the Japanese public who don't seem to realise that their government's problems are their problems.

Not easy to get out of the mire, but things will start to look better once the leaders start pointing in the necessary direction. Worst case is they don't and the IMF is brought in, but that way might at least be the fastest way out of the mess.

sfjp330,

when the Japanese politicians say Abenomics is well on its way to achieving its goals, they must mean of lowering living standards for all Japanese people.

I think that's just reality catching up with the people. The government needs to be trimmed down to fit it's clothes, and the people will feel the impact of the government going on a diet (or paying for it's new clothes).

0 ( +0 / -0 )

I would like to agree with you fxgai, and I too have met the "reformist" minded people, but the force is too strong that binds Japanese together. It keeps any reformist from ever achieving anything, unless they are a nationalist. Its back to the cliche "the nail that sticks up gets hammered down" and shame is not something Japanese like to live with. Its a very Japanese issue, and that takes priority to anything else. A foriegner may bring some fresh ideas, but in the end, he/she is a foriegner, and cant really understand Japan. Their ideas and applications must be cleansed and modified from within, then they are safe.

0 ( +2 / -2 )

the government is thought to be compiling an extra spending plan worth around 5 trillion yen

The LDP's answer to everything: more spending. What happened to bringing the budget back into balance? Never mind, just keep on wheeling out the delusional Kuroda to tell us how everything is fine.

0 ( +1 / -1 )

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