Japan’s retail sales slump the most since 2015 as tax hike hits demand

The Japanese government increased the nationwide sales tax to 10% from 8% on Oct. 1, in a bid to fix the industrial world’s heaviest public debt burden, which is more than twice the size of the country’s gross domestic product.However, some analysts have warned the tax hike, previously postponed twice, could leave the economy without a growth driver amid a slump in exports and production and as other factors drag on the consumer sector.

Retail sales fell 7.1% in October from a year earlier, pulled down by weak demand for big ticket items such as cars and household appliances as well as clothing, trade ministry data showed on Thursday, with department stores hit particularly hard.The drop was the biggest since a 9.7% fall in March 2015 and worse than a 4.4% decline predicted by economists in a Reuters poll.“Regardless of today’s outcome, consumption has been of a weak tone, and consumer sentiment is getting worse,” said Taro Saito, executive research fellow at NLI Research Institute.“Incomes haven’t been rising originally, so consumption hasn’t been growing since before the sales tax hike.”The slump was also sharper than the declines reported after the previous two sales tax hikes, in 1997 and 2014, suggesting other factors are dragging on consumption.“Retail sales fell more sharply in October than after previous sales tax hikes,” said Tom Learmouth, Japan economist at Capital Economics.“The fall in sales was slightly larger than the 13.7% m/m plunge which followed both the 1997 and 2014 sales tax hikes,” he wrote in a note. Sales fell 4.3% in April 2014, the month of the previous tax hike.Seasonally-adjusted retail sales dropped 14.4% month-on-month in October, the data showed.The negative reading comes after separate data this month showed Japan’s economy nearly stalled in the third quarter, while exports in October shrank at their fastest pace in three years.The gloomy conditions have led to calls for the government to compile a big spending package to keep the country’s fragile economic recovery on track.PRICE PRESSURES PERSISTThe 2014 previous tax hike to 8% from 5% hit the broader economy hard as households tightened their purse strings after front-loading purchases before the hike.Policymakers this time around do not expect the October tax hike to trigger such a big swing in demand, given the smaller hike and various measures to help offset the hit to spending.However, analysts said retail sales in October were also hit by poor weather, after a huge typhoon ripped through central and eastern Japan, forcing stores and restaurants to temporarily close.Others also noted more structural pressures faced by retailers even before the sales tax hike, such as the prolonged decline in real wages.Data earlier this month showed inflation-adjusted wages rose 0.6% in the year to September, their first increase since the end of last year.All those factors pose challenges to a government seeking to shake consumers out of a long-entrenched deflationary mindset, which has weighed on prices, hurt company profits and established a prolonged regime of ultra-easy monetary policy.Adding to these woes is the risk retailers will continue to cut prices to offset the hit from the tax hike, while many stores are also offering discounts for cashless payments.The government has introduced a rebate program for cashless transactions designed to both soften the tax hike blow to retailers and encourage Japanese consumers to use electronic payments instead of cash.Other retailers are simply reducing prices to lure customers.“This could spark stiff price competition and induce deflation. Small firms that lack competitiveness will be forced out of business,” Yukio Kawano, the head of Japan Supermarket Association, told Reuters.

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