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article imageJapan's economy shrinks during third quarter

By Ken Hanly     Nov 18, 2014 in Politics
Tokyo - Japan's economic performance was hurt by a recent sales tax hike and investment by business declined. The economy shrank by 1.6 percent even though predictions were that there would be growth following a large decline in the previous quarter.
The decline may increase uncertainty about global economic growth as China's growth is slowing and the Eurozone grew only by 0.2 percent last quarter. Japan is the world's third largest economy. Effects on stock markets were mixed: U.S. stocks ended mixed Monday -- with the S&P 500 managing to set another closing high -- after Japanese markets tumbled on news that the world's second-largest economy unexpectedly slipped back into recession.
The hike in the sales tax appears to have created less demand from consumers, builders and manufacturers. In April the sales tax was hiked from 5 to 8 percent. Prime Minister Shinzo Abe is using the revenue to try to reduce debt which is the worst among advanced industrialized countries. A plan to further increase the tax to ten per cent has been shelved for now. After the recent sales tax hike, investment in housing shrank by 24 percent in the recent quarter while corporate capital investment was down by 0.9 percent. Consumer spending rose by merely 0.4 percent.
As many expected, on Tuesday, Abe called for an election in December: Shinzo Abe told a televised news conference on Tuesday that he would dissolve the lower house of parliament on Friday to pave the way for an election on 14 December. He added that he would delay a rise in the consumption [sales] tax, from 8% to 10%, until April 2017, 18 months later than planned.
Abe has claimed that passage of his three arrow "Abenomics" program is vital to improving the Japanese economy and pursuing necessary reforms. He hopes the elections will give him a mandate to continue with the program which involves monetary easing on steroids, government spending, and deregulation of business. He speaks of the policy as a "three arrow" strategy based upon a Japanese folk tale whose moral is that three sticks together are much harder to break than just one. Wikipedia describe Abenomics as follows: Abenomics refers to the economic policies advocated by Shinz┼Ź Abe since the December 2012 general election, which elected Abe to his second term as Prime Minister of Japan. Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and structural reforms.
When introduced in 2013 the policy sent Japanese stock markets to their biggest gain in 40 years but now the policy when combined with the increased sales tax appears not to be working as planned.
Abe has been so far unwilling to pursue some promised deregulation of business and corporate tax cuts as well as labor regulations that in larger companies guaranteed Japanese workers lifetime employment.
Japan's population is aging and also declining. Household incomes have not kept pace with inflation. Japanese corporations have outsourced some production outside of Japan to countries with cheaper labor and laxer regulations.
Abe has already reacted to the depressing news by adding even further stimulus to the tune of $26 billion to $35 billion. The measures may include some subsidies to low-income families which would stimulate demand. While the lower yen should help exports, many producers depend upon imported components which become more costly as the yen falls in value. Crticis blame Abe for not moving faster on changing labor regulations but corporations have also contributed to the situation by not passing on to workers the gains they have had from growing profits and increased stock prices.
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