The smug self-confidence of financial analysts and writers who predicted that Japan's monstrous sales tax increase would have no long-term effect on its economy should be severely shaken.
An Associated Press report tonight by business writer Elaine Kurtenbach tells readers that the Land of the Rising Sun's economy "contracted at a larger than earlier estimated annual rate of 7.1 percent in April-June, as companies and households slashed spending following a tax hike." This means that the "experts" who assured everyone that the second-quarter contraction would be smaller than or merely offset the brisk first-quarter expansion of 6 percent were horribly wrong.
The first quarter was so strong because consumers bought everything they could put their hands on before a 60 percent increase in the national sales tax from 5 percent to 8 percent took effect.
People actually get paid to forecast the Japanese economy's direction thought that everything would return to normal once the higher tax kicked in. People who don't get paid a dime but who are in touch with the real world would have expected that the higher tax would be far more likely to create a permanent drag on the economy — and they have been proven right.
Here are several choice paragraphs from Kurtenbach's report (bolds are mine):
The revised data released Monday show business investment fell more than twice as much as estimated before, or 5.1 percent, while private residential spending sank 10.4 percent, in annual terms. The earlier estimate showed the economy contracting 6.8 percent.
The recovery of the world's third-largest economy has slowed following the increase in the sales tax to 8 percent from 5 percent on April 1.
Actually, "the recovery of the world's third-largest economy" has ended. Continuing:
Theoretically, there should be no impact from the consumption tax increase on corporate spending or long-term corporate planning, but a large number of Japanese corporations seemed to see a large impact from the hike on final demand," said Junko Nishioka, an economist at RBS Japan Securities in Tokyo.
How anyone can be shocked by this, which appears to be the case, is beyond me.
Finally, there's this:
(Prime Minister Shinzo) Abe faces a tough decision over whether to go ahead with a pledge to raise the sales tax by another 2 percentage points, to 10 percent in 2015. The tax hikes are needed to counter ballooning public debt, which now is more than twice the size of the economy.
The tax hikes are likely to send the Japanese economy into a tailspin.
The press's handling of this situation involving a huge tax increase is revealing. It's all to typical for the journalists to assume that tax increases don't affect behavior a bit. But of course they do. They almost always hold back an economy from achieving what could have been achieved. But they'll almost never admit it.
Cross-posted at BizzyBlog.com.
