Tokyo Report

Japan’s Second Quarter Slump Could Be Worse Than ‘97

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Tokyo Report

Japan’s Second Quarter Slump Could Be Worse Than ‘97

The tax increase has dealt a blow to GDP, and structural reform may be too late to help.

Japan’s Second Quarter Slump Could Be Worse Than ‘97
Credit: Keyboard via Shutterstock

A handful of data and surveys this week show that Japan’s recent economic recovery may be stalling, as the effects of April’s consumption tax increase take hold and external forces such as rising energy costs constrain growth. While the tax increase was expected to have a pronounced negative short-term effect, some economists now doubt if the virtuous circle of a tightening labor market driving up wages, and subsequently consumption, will actually happen. What is troubling in this regard is that June saw an unexpected rise in unemployment from 3.5 percent to 3.7 percent, the first rise in 10 months.

First of all, a Nikkei survey of economists found that the effects of April’s tax increase on GDP may be greater than the last tax hike in 1997, which led to a prolonged recession. The survey estimates that year-on-year growth for the second quarter shrank 7.1 percent. While the economy is expected to bounce back in the third quarter somewhat, predictions range from as low as 2.8 percent to as high as 7.9 percent on increased capital spending and large summer bonuses.

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