TOKYO -- The negative impact from Japan's consumption tax hike in April has lingered longer than expected, with real gross domestic product contracting for the second straight quarter in July-September.
But the economy may now be looking up. With a delay in the second tax hike becoming more certain, there is a pressing need to create a positive cycle where income gains boost consumption and investment.
"We underestimated the drop-off in consumption after the tax hike," said Koji Fukutani, president of Kansai Super Market, operating primarily in Osaka and Hyogo. The bad weather over the summer also deterred customers, causing the retailer to log its first operating loss as a listed company in the April-September half.
July-September GDP was expected to rise from the previous quarter, which plummeted in the wake of frenzied buying prior to the tax hike. The big miscalculation was how sluggish the recovery would be, according to Professor Takao Komine at Hosei University.
Climbing prices from the tax hike and the weak yen are hurting households. Employment figures have improved as a result of higher corporate profitability and a labor shortage, which have also pushed up wages -- but not as quickly as consumer prices. The disappointing GDP figures illustrate the weakness in the Japanese economy, where consumers, who have grown accustomed to deflation, overreact to rising prices.
The negative growth was partly caused by a decrease in inventory as companies adjusted output. Even then, the weakness of the recovery was undeniable.
But few see the economy entering a prolonged contraction. Consumption has started to recover slowly since the fall, and the value of household appliance shipments rose from a year earlier in September, marking the first gain in five months.
"While there had been a minirecession since February, it's possible that the economy is now recovering after bottoming out in August," said Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities.
Hidenobu Tokuda at Mizuho Research Institute predicts that GDP will grow an annualized 4% in the October-December quarter. "Winter bonuses will boost consumption," he said. "Wages will also rise at small and midsize enterprises that will benefit from cheaper crude oil prices."
But for others, the way forward is not as clear. "I think there's some recovery, but I can't be sure," said Toyota Executive Vice President Nobuyori Kodaira, who remains concerned about domestic sales.
The automaker's output in Japan continued to languish in July-September, falling 4.5% on the year. According to the production plans it provided to clients in October, the numbers will barely pick up in November and December and may not fully recover until January.
And many small and midsize enterprises are more fixated on the costs of the weak yen rather than the benefits. "Rising production costs have made things difficult," said the head of the business association in the Nagano Prefecture city of Suwa, home to a number of precision machinery and auto-related businesses. "We can't pass on the costs to our clients, and it's squeezing profits."
From a macro point of view, a soft yen delivers more benefits than costs for the Japanese economy. For example, air conditioner maker Daikin is moving production of household units from China to Japan. These types of developments could boost domestic employment and capital investment.
The sluggish recovery signals that Abenomics, which is based on the premise that improved corporate earnings would lead to increased household income and consumption, is not functioning properly. Japan's potential growth rate is in the mid-0% range. If left unaltered, even a small shock could kick the country back into negative growth.
The original goal of Abenomics was to buy some time through monetary easing and fiscal stimulus to boost Japan's growth potential. To end the chaos that follows every decision made on a tax hike, structural weaknesses must be tackled head-on.