TOKYO -- Japan's economy appears to have taken a bigger hit from the April 1 consumption tax hike than from the previous increase in 1997.
Real gross domestic product shrank at a 7.1% annualized rate in the second quarter, according to the average estimate of 10 nongovernment economists surveyed by The Nikkei. That is nearly double the 3.7% contraction 17 years ago.
Private-sector economists checked their sums in light of last month's slump in factory output. June industrial production dropped 3.3% from the previous month, according to preliminary data released Wednesday by the Ministry of Economy, Trade and Industry.
The tax increase put the economy on a roller-coaster ride. GDP grew 6.7% in the first quarter as consumers crammed in purchases. Both the climb and the subsequent drop were steeper than in 1997, when a 3% first-quarter expansion was followed by a 3.7% reversal. This time, growth is expected to resume in the July-September quarter at 4.4%, according to the estimates.
Many economists were surprised by how sharply consumers cut back spending after the tax hike. On average, the 10 economists reckoned consumer spending sank 4.1% in the April-June quarter. Prices had been rising since last summer, adding to the pressure on consumers to stockpile.
"The rush of spending before the tax hike was unexpectedly big, and so was the reversal," said Atsushi Takeuchi, a principal economist at the Japan Center for Economic Research.
A hoped-for turnaround in corporate investment likely remained elusive. Capital spending dropped 3.9%, falling for the first time in five quarters, the economists reckoned. Again, the vagaries of demand were at work. Corporate spending on computers rose in the first quarter as businesses prepared for the looming expiration of support for the Windows XP operating system.
The economy did get support from supplementary government spending, with public investment rising 0.9% in the second quarter.
While the forecasters agreed that the economic recovery will get back on track in the current quarter, they differed on its speed. Daiju Aoki, a senior economist at UBS Securities Japan, projected annualized growth of 5.6%. He is counting on increases in summer bonuses and spending by well-off seniors.
"Companies are going to become more inclined toward capital spending," predicted Tomoo Kinoshita, chief economist at Nomura Securities. Big corporations are planning to boost investment by 7.4% in fiscal 2014, according to the Bank of Japan's latest "tankan" survey of business sentiment.
But there was no shortage of cautious views. Estimates of third-quarter growth ranged from 7.9% to just 2.8%. Going by the average growth estimates, real GDP will not top this year's first-quarter level until the same quarter next year.
"A full-fledged economic rebound is still quite a ways off," said Kiichi Murashima, chief economist at Citigroup Global Markets Japan.