Government survey shows while sentiments are down following April’s sales levy increases, analysts say the gloom could be fleeting, reports Team IFM
Tokyo, May 14: The section of Japanese society most susceptible to economic fluctuations – people such as taxi and truck drivers, department store sales staff and restaurant and shop owners – are downbeat following the sales tax hike last month, said a survey report released here on Monday.
But at the same time the report, called the Economy Watchers’ Survey – commissioned by Japan’s Cabinet Office to track the sentiments of this section – also said this section believes the situation would look up.
According to the report, the Economy Watchers Current Index fell to a seasonally adjusted 41.6 in April from 57.9 in the preceding month, signifying a drop in confidence. It was the first drop in two months.
The April figure was the lowest since 40.0 marked in November 2012. Moreover, while economists had predicted a fall, they had not foreseen it to nosedive below the 45 mark.
The Cabinet Office attributed this steep fall to sales levy increases – from 5 percent to eight percent, the first such hike in 17 years – that came into effect in April.
Companies and consumers flocked to make purchases before the levy hike, pushing the country’s industrial production to its highest point since June 2011 in March. Demand, however, has waned since then, and so has output.
“The gradual recovery trend has continued but some weakness is seen in light of a pullback in demand after the consumption tax hike,” the Cabinet Office said. “The economy is expected to recover gradually.”
The takeaway from the survey report is the vote of confidence of the future. The outlook index climbed more than expected – by 15.6 points – to 50.3 in April, from 34.7 the month before. While analysts had predicted a reading of 40, this marked the first rise in five months and moved above the key level of 50 for the first time in four months.
Analysts believe the slump in spending on some goods and services may be brief. The survey quoted one retail store manager as saying that people were enjoying consumption according to their lifestyles, and not being dictated so much by the sales tax hike.
“A strong rebound in the outlook component suggests that any consumption tax-related weakness will prove fleeting,” said Marcel Thieliant, Japan economist at Capital Economics.
“The outlook component was more than eight points above the current activity component last month, and positive gaps of this magnitude have usually been followed by an improvement in current activity in future months,” the economist was quoted by news service RTT as saying.
SUBDUED ACTIVITY
The Economy Watchers’ Survey report was in line with the current economic scenario in Japan. Japanese service companies reported a fall in business activity in April, with the solid pace of reduction the sharpest since September 2011, said a report by economy tracker Markit last week.
Following a similar trend, new business declined for the first time in nine months. In both cases, firms linked the reductions to the rise in the sales tax.
In contrast, April saw growth in payroll numbers for the fourth month running and at a faster pace than in March. Both prices charged and input prices increased at much sharper rates, with the rate of inflation of output prices a series record.
Markit’s headline Business Activity Index decreased to 46.4 from a reading of 52.2 recorded in March. Posting below the crucial 50.0 no-change mark – which separates growth from contraction – meant the index had signalled a sharp decline in Japanese services activity.
“Exactly 23 percent of panellists commented on a reduction in business activity in April,” said Amy Brownbill, economist at Markit and author of the report.
In contrast to the fall in new business and output, both Japanese manufacturers and services saw growth in their payroll numbers during April. The Composite Employment Index recorded a ninth consecutive monthly increase in employment, with the rate of job creation quickening since March.
This was primarily because volumes of work outstanding at Japanese service providers rose for the second month running in April. “Some panellists stated they were still trying to cope with the increased new orders which had been recorded in March before the rise in the sales tax,” Markit said.
In comparison, work outstanding declined for Japanese manufacturers for the first time in nine months. Japanese manufacturers attributed the decline to the fall in orders following the implementation of the sales tax.
However, Japanese service providers in April recorded the strongest optimism registered since
September 2013. Companies attributed this to “positive improving economic conditions over the next 12 months” and the continued increase in payroll numbers leading to a rise in activity.
“The implementation of the sales tax had a damaging effect on the business activity of Japanese service companies, with a number of panellists commenting on the increase in sales tax as the main contributor,” said economist Brownbill.
“Interestingly, business expectations over the next 12 months remained positive for Japanese services, with the highest reading since September 2013. This helped employment payroll numbers to remain in growth territory in April,” she added.
Q1 BLUES
In an earlier report released on May 3, Markit’s Chief Economist Chris Williamson said that although PMI data indicate that Japan’s economy is growing faster than recent official data have indicated, “the surveys also suggest that the economy has started to slow even before April’s sales tax rise”.
The all-sector index averaged 53.0 in the first three months of 2014 against 54.7 in the closing quarter of last year.
Williamson said there is a concern that “Abenomics” – an informal term for the economic policies of Prime Minister Shinzo Abe – has achieved little more than an unsustainable growth spurt, fuelled mainly by a surge in Japanese equity prices and a sharp fall in the value of the yen.
According to Williamson, the surveys provide evidence to suggest that some waning in growth is now underway, which will no doubt be exacerbated by April’s sales tax rise. “In fact,” he said, “the PMI index measuring services sector firms’ confidence for the year ahead fell in March to its lowest since June 2012.”
At the same time, he said, while this fall in confidence was in many cases attributed to the impending sales tax rise, there is an accompanying concern that the recent fall in equity prices could also be hitting confidence, and subdue economic growth at the same time as the sales tax hits.