August 14, 2014 3:24 am JST

Japan's economy to recover from tax hike, resume mild growth

TOKYO -- The Japanese economy will likely return to moderate growth on stronger corporate and consumer spending in the second half of this year, bouncing back from a April-June decline caused by a consumption tax hike, private-sector economists say.

     The Cabinet Office said Wednesday that gross domestic product shrank an annualized 6.8% on the quarter in the three months through June. The decline was the steepest since the first quarter of 2011, when the Great East Japan Earthquake hit.

     But the 12 private-sector research institutes that provided projections are upbeat about the rest of the year. They forecast an average of 4.4% annualized GDP growth in the July-September period and a 2.1% expansion in the October-December term, surpassing the potential growth rate of just under 1%.

     The performance of the current quarter is particularly important, given that the government will look at GDP in the current quarter in deciding whether to raise the sales tax to 10% in October 2015.

     Consumer spending dropped 5% in April-June, but is projected to grow 1.6% this quarter and 0.6% in the following three months.

     Although real wages have been lower than a year earlier because of price increases and the sales tax hike, larger summer bonuses, wage upgrades at major corporations and higher hourly wages stemming from labor shortages are expected to gradually bolster income levels.

     Amid steady corporate earnings, capital investment is also expected to pick up from the July-September quarter, after dropping 2.5% in the previous quarter.

     Capital spending planned in Japan for fiscal 2014 is up 15.1% on the year, according to the Development Bank of Japan, the sharpest increase in 24 years.

     "Given the manpower shortage, labor-saving investment will rise mainly in the nonmanufacturing sector," said Tomoo Kinoshita at Nomura Securities.

     Public works spending shrank by 0.5% in the April-June quarter, coming as a surprise to many. Although the government is working to move up projects, the tight labor market and higher material costs may be causing delays.

     The biggest concern going forward is exports, which fell 0.4% in the April-June period. With many manufacturers stepping up overseas production, reduced output capacity back home may hamper growth in this area.