Japan slumps following Consumption Tax rise

Wed 13th Aug 2014

The Japanese economy underwent a 6.8% drop in the second quarter of 2014 following the Consumption Tax rise from 5% to 8% on 1 April.  This drop wiped out the 6.1% growth in the first quarter of the year – much of which was created by advance purchasing by consumers ahead of the long-planned sales tax rise.

Whilst a big fall in this quarter’s figures was anticipated, the extent of the drop will raise concerns.  The Japanese Consumption Tax rise was implemented to help meet the social security costs of the country’s aging population, and a second rise to 10% is pencilled in for October 2015.

If there is not an immediate big rebound in the Q3 economic performance, it is likely that the Bank of Japan will be forced into injecting more money supply into the economy.  Japan already has a Quantitive Easing program me.  Currently, forecasters have indicated a growth rate of up to 5% in July to Sept.