Consumer spending in Japan slumped in June because of a tax hike pushed through by Prime Minister Shinzo Abe. Economists claimed it would be temporary and spending would quickly recover thanks to inflation.
Let's take a look at what actually happened.
Japanese Household Spending Slumps 5.9%
Yahoo!Finance reports Japan Household Spending Slumps, Output Flat as Tax Pain Persists
Japanese household spending fell much more than expected and factory output remained weak in July after plunging in June, government data showed, suggesting that soft exports and a sales tax hike in April may drag on the economy longer than expected.
Household spending fell 5.9 percent in July from a year earlier, nearly double the drop forecast in a Reuters poll, as the higher levy and bad weather kept consumers at home instead of going out shopping.
Weak exports left companies with a huge pile of inventories, forcing them to continue cutting back on factory output, separate data showed.
Industrial output rose 0.2 percent in July, much less than a 1.0 percent increase projected in a Reuters poll, data by the Ministry of Economy, Industry and Trade showed. That was a tepid rebound from a 3.4 percent fall in June, the fastest drop since the March 2011 earthquake.
Japan's economy shrank at an annualized 6.8 percent in the second quarter from the previous three months, more than erasing the 6.1 percent first-quarter surge in the run-up to the sales tax hike.
Analysts generally expect Abe to approve another tax hike in December, but that decision promises to be politically divisive, coming just as the government hammers out details of a promised corporate tax cut.
Amusing Details
The Financial Times has some amusing details in Japanese Economy Flounders After Sales Tax Rise
Consumer prices rose 3.4 per cent in July compared with a year earlier, including the added tax. Stripping out the tax effect as well as the impact of volatile fresh-food prices — the formula favoured by the Bank of Japan — showed underlying inflation was 1.3 per cent, a level unchanged from June.
The BoJ is facing a dilemma. The dramatic monetary expansion it embarked on in April last year has succeeded in reversing persistent consumer-price deflation, a goal the central bank had pursued fruitlessly for years.
But inflation is now both too high and too low: too high because wages have not kept pace with price rises, making the average worker worse off; but also too low, because the BoJ believes even larger price rises are needed to keep Japan out of deflation for good.
The bank has set a target for core inflation of 2 per cent but most private-sector economists believe that, unless demand in the economy picks up suddenly, more monetary stimulus will be needed to reach it. Yet simply printing more money could further widen the price-wage gap, in the short term if not the longer.
“It is important to recognise that the VAT hike has had a material impact on real income levels, suggesting that spending is now being held back mostly by a decline in real purchasing power,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse.
Inflation "Too High and Too Low"
Got that? Spending was supposed to pick up due to inflation. Instead it went south because of a decline in purchasing power, exactly the opposite of what Keynesian theory suggests.
The standard, Keynesian answer ... "more stimulus is needed" to raise prices to even more unaffordable levels.
Oh yeah! That will get everyone spending money they do not have to buy things they do not need.
And to top it off, Abe wants still more consumer tax hikes to rein in debt.
Keynesian Success
To be fair, I expect that someday Abe will succeed beyond his wildest dreams if he stays in office long enough.
Want to know what success looks like?
Here's a recent example that depicts the ultimate in Keynesian Inflation Success.
I rather doubt it gets that far, but with politicians hell-bent on "success", one never knows.
