Annual Rate of Decline Compares to the Great Financial Crisis and the Tsunami Disaster
Econintersect: The annual rate of decline of Japan’s GDP in the second quarter has a preliminary reading of -6.8%. The economy was crushed by a 60% increase in the country’s consumption tax. As 
bad as the number sounds it was actually a slightly better result than the consensus of economists who had predicted -7.1%, according to the Financial Times. The quarterly contraction 0f 1.7% is similar to the second quarter 2011 following the earthquake and tsunami disaster that severely damaged the northeast coastal area of the country. That event moved the main Japanese island of Honshu east by 8 feet (2.4 meters) and shifted the earth on its axis. That cataclysm was followed by a quarter (2Q/2011) with 1.8% GDP contraction. We can now call the April 1 tax increase the “consumption tax tsunami”.
The impact of the Great Financial crisis on Japan was much greater than the current contraction. In Q1/2009 GDP contracted 3.3%, almost twice the current setback and Q2/2009 was even worse at -4% quarter-over-quarter.
GDP Change is Quarter-over-Quarter.
This GDP contraction will be viewed as indicating that the economic stimulus program of Prime Minister Shinto Abe (called “abenomics”) is a failure. The attribution is only partly correct: This is a condemnation of what amounted to a substantial austerity program, the hiking of a tax, which has more similarity to a value added tax than a simple sales tax or consumption tax, right in the middle of fragile economic recovery. And the plan is to do another smackdown on the economy in 2015, following the 2014 tax increase from 5% to 8% with another hike to 10%. The idiocy of this economic plan was described by GEI News in July last year:
The government of Japan under Shinzo Abe is following policies that are self-contradicting. The recent headlines have focused on monetary expansion with that will put the U.S. to shame for sheer size of the effort. Less attention has been given to the seemingly draconian tax increases on consumption. Taxes will increase by 60% in April 2014 and a total of 100% from current levels by October 2015. While pouring money into the financial system with one hand Abe will be draining it from consumers with the other.
The tax increase on April 1 was estimated by GEI News to have grabbed between 3% and 4% out of the Japanese domestic economy. If we just consider household consumption, that comprises about 60% of Japan’s GDP so 3% to 4% removed from that is a GDP contraction between 1.8% and 2.4%. When one considers that other segments of the domestic economy felt the tax increase the realized contraction of 1.7% seems lower than might have occurred at constant spending. Perhaps GDP actually grew once the tax increase effects are factored out. That offers some hope for establishing a new quarter-to-quarter growth pattern. Japan can only hope that the tsunami quickly recedes and the economy can reestablish a benchmark on the new terrain that remains after the newest “land shift”.
Sources:
- Japanese GDP shrinks most since 2011 quake (Jonathan Soble, Financial Times, 13 August 2014)
- Japan: Conflicted Policy (GEI News, 04 July 2013)
- Japan GDP Growth Rate (Trading Economics, 13 August 2014)
