Japan hit by sales tax rise

The Japanese economy may have suffered a setback, but it's too soon to panic.

Japan's economy shrank by 1.7% (an annualised rate of 6.8%, in the second quarter of 2014), the worst fall since the global financial crisis in 2009.

This was largely due to April's hike in Japan's sales tax, the equivalent of VAT, from 5% to 8%.Consumers had bought more goods in the first quarter to dodge the tax, driving GDP up by a similar amount to the second quarter slide.

What the commentators said

The collapse in household spending, for instance, was 5% quarter-on-quarter, worse than after the 1997 tax hike. Recent data has looked shaky too, especially on industrial output. Machinery orders have slid, reversing almost the entire recovery since 2013. And consumer price inflation is running ahead of wage increases.

But it's too soon to panic, noted Capital Economics. "It was always unlikely that the impact of the consumption tax would fade overnight." The broader outlook remains encouraging. With spare production capacity dwindling, firms should keep investing in equipment.

Consumers are also in solid shape. Confidence has risen for three months in a row, employment growth is solid, and pay looks set to catch up with inflation. Summer bonus payments, a key component of salaried workers' pay, have risen by the biggest margin since 1990, noted the FT's Jonathan Soble.

In any case, "extra tutoring sessions are available in case this student falters", said Aaron Back in The Wall Street Journal. The Bank of Japan has said it will print money for as long as it needs to in order to reach a 2% inflation target.

Inflation has eased of late and "it is hard to see how it can get [to target] if the economy falters". In that case, more quantitative easing is on the cards, which bodes well for stocks. Throw in "undemanding" valuations, and it's clear that equity investors should stick with Japan.

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