Japan growth slows, adds to sales tax uncertainty

By Leika Kihara and Stanley White ,Reuters

TOKYO — Japan’s economic growth slowed more than expected in the second quarter, offering ammunition to those seeking to temper a planned sales-tax increase even as government debt has risen past 1,000 trillion yen (US$10.4 trillion). But as the sharp slowdown was driven by an unexpected fall in corporate capital spending while personal spending remained hardy, the data may encourage Japanese Prime Minister Shinzo Abe to proceed with the tax hike and soften the pain by offering tax breaks to boost business investment. The sales-tax rise is meant as a first step toward tackling Japan’s enormous public debt.

The world’s third-largest economy grew by an annualized 2.6 percent in April-June, government data showed on Monday, a third straight quarter of expansion but below both market expectations of 3.6-percent growth and a downwardly revised 3.8-percent rate in the first quarter. Abe, whose top priority has been to spur growth and pull Japan out of 15 years of deflation, faces in coming weeks what he has called the tough decision of whether to go ahead with the tax increase.

Under a multi-party agreement last year, the tax is to rise to 8 percent from 5 percent next April and to 10 percent in October 2015. But the government must certify that the economy is strong enough to withstand the pain of the fiscal tightening. The premier is to decide by early October, and government officials have flagged the April-June GDP, and its revision on Sept. 9, as key factors. “The economy has been steadily rising since the inauguration of the Abe administration last year,” Abe told reporters. “I’ll continue to take all possible care about the economy. I’d like to focus on the economy, including implementation of further growth strategies in the autumn.” Abe’s government is divided on the sales tax, with reflationist advisers urging him to delay or water down the increase and the Finance Ministry avidly urging him to proceed, given the nation’s dire finances. Public debt exceeded 1 quadrillion yen — or 1,000 trillion yen, about double GDP, for the first time in June. The reflationist camp jumped on the weak GDP data. “There is no need to raise the sales tax in a hurry,” Koichi Hamada, an adviser to Abe and a professor emeritus at Yale University, told Reuters. But economists noted that growth remains robust. Some, like Mari Iwashita at SMBC Nikko Securities, said GDP is more likely to be revised up than down because the two weakest elements, capital spending, are the ones that typically change the most. “At the moment Japan’s growth is still the fastest among the developed economies, thanks partly to ‘Abenomics,’” Iwashita said.