May 17, 2016 7:00 am JST

Negative GDP data seen factoring into tax hike delay

YUMIKO OSHIMA, Nikkei staff writer

A slump in consumer spending is taking a toll on Toyota Motor and other automakers.

TOKYO -- Japanese gross domestic product data due out Wednesday is expected to show effectively negative growth for the January-March quarter, a poor performance that Prime Minister Shinzo Abe will likely cite if he postpones a planned consumption tax hike as expected.

The median estimate of 25 private-sector research firms puts seasonally adjusted real GDP growth for the quarter at an annualized 0.3%. The seasonal adjustment does not correct for the added day from the leap year, which lifts growth by an estimated 1.2 percentage points. Excluding this leaves growth in negative territory for a second straight quarter, after the 1.1% decline of October to December.

A two-quarter streak of economic contraction is automatically considered a recession in the U.S. and elsewhere. Though Japan has no such fixed criteria, the government may have to rethink its assessment of the economy as "on a moderate recovery."

The private-sector estimates show consumer spending, which accounts for 60% of GDP, ticking up 0.3% after a decline in the previous quarter. But spending was actually stagnant if the leap-year boost is excluded. Lackluster consumption stems from uncertainty over the future and measures that spurred buying at the expense of later demand, such as tax cuts on environmentally friendly vehicles, said Mari Iwashita, chief market economist at SMBC Friend Securities.

Growth was weighed down by a 0.8% contraction in capital spending, the first drop in three quarters. This year's yen appreciation and stock market decline have likely left companies hesitant to open their pockets.

The government's bullish view of the economy owes to record corporate profits and the best employment indicators since the economic bubble. But the future looks grimmer, with Toyota Motor forecasting that operating profit will drop 40% in the fiscal year ending March 2017.

Factory stoppages in the wake of the Kyushu earthquakes will almost certainly dent GDP growth in the April-June quarter. If this happens, then Japan could well experience three straight quarters of economic contraction for the first time since the April-December period of 2012.

The current Diet session's first one-on-one debate between party leaders is scheduled for Wednesday afternoon, after the GDP data comes out. Abe pushed back in 2014 the consumption tax hike now scheduled for April 2017 and declared that he would not delay it further, insisting that the government would create an economic environment able to handle an increase. The opposition is sure to use data showing effectively negative growth last quarter as a club to beat Abenomics with.

Yet economic growth of around zero is in keeping with Japan's potential growth rate of less than 0.5%. The economy's lack of momentum does not mean that the picture is bad all around, as it was during the global financial crisis. Opinion is divided on whether Abe's likely decision to delay the tax hike again represents a significant departure from his repeated assurances that he would not do so, barring a major financial crisis or natural disaster.

The debate over the state of the economy will likely heat up ahead of a busy stretch on the political calendar. The Group of Seven summit in Japan, the end of the current Diet session, and the upper house election all fall between May and summer.

Toyota Motor Corp.

Japan

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