Sales Tax Increase Slams Japanese Manufacturing

April 30th, 2014
in econ_news, syndication

Econintersect:  Japan PMI (Purchasing Managers' Index) confounded economists (who had projected a reading of 53.0) with a report of 49.4 for April 2014, down from 53.9 in March.  New orders, output and exports all declined, but employment grew at the fastest rate in more than 7 years.

From Markit:

Japanese manufacturing firms saw a decline in output for the first time in 14 months in April. Alongside this fall in output was a deterioration in new orders which also decreased for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax.

Click on chart for larger image.

Follow up:

The following chart from Trading Economics shows the monthly numbers for the past two years:

In Julyjapan-pmi-2014-apr

While Japan has been pursuing aggressive monetary expansion for the past year, the country has proceded with a contractionary fiscal policy.  In July 2013 GEI News reported on the conflicted fiscal and monetary policies, including this:

Japan is presumably undertaking a massive QE program to counter years of depressed consumer demand.  Here is how financial analyst John Brown put it in the Pittsburgh Tribune-Review:

Responding to a decade of depressed consumer demand, Haruhiko Kuroda, governor of the Bank of Japan, announced this spring a program of quantitative easing of about $1.4 trillion by 2014 to boost the island nation's economy.

The magnitude of the Japanese QE relative to GDP is equivalent to the U.S. Fed continuing the $85 billion per month asset purchases for almost four years, or until  well into 2016.  Unless the talk of taper is a smoke screen the Fed will be out of this liquidity program well before then.  Japan is headed for uncharted territory, even more so if their QE continues beyond 2014.

And if this is aimed at stopping deflation by increasing consumer demand, what is the logic of increasing the "take" of the government from the consumer by increased taxation in the amount of about $30 billion a year in increased consumption taxes by the end of 2015?  When the current tax is included the CT will be decreasing demand by more than $60 billion a year if the amount of spending remains constant.  At constant spending for 20 years the total taken out of the economy will be $1.2 trillion.  Of course Japan wants spending to increase so the total could be higher.

How conflicted can you get?


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