|THE TAX INCREASE ISN'T KILLING JAPAN'S RECORVERY|
Aruba, June 13, 2014 - Japanese Prime Minister Shinzo Abe’s economic revival program received an unexpected boost Monday. Japan’s economy grew an annualized 6.7 percent in the first quarter of the year, the government announced. That’s a revision from the earlier estimate of 5.9 percent and far better than the median forecast of 5.6 percent by economists surveyed by Bloomberg News. The gross domestic product number was the best since voters put Abe in office in December 2012, when the economy grew a miserable 0.2 percent on an annualized basis in the final three months of the year.
A big factor in the surprise was a large increase in investment by Japanese companies, with private nonresidential investment growing 7.6 percent, compared with expectations of 4.6 percent. The result was a “blockbuster” private-sector expansion, according to a report published today by HSBC (HSBC) economist Izumi Devalier.
The question is, will the blockbuster expansion fizzle? The latest quarterly growth figure may be the best yet, but of course that’s largely because so many Japanese consumers and companies front-loaded spending before the April 1 increase in the consumption tax. With that tax increase now in effect, raising the consumption tax to 8 percent from its previous 5 percent, the economy is likely to slump in the second quarter. That has led to warnings of Abenomics turning to Abegeddon.
Still, there’s reason to be optimistic the tax increase won’t smother Japan’s nascent recovery. The first quarter’s strong performance “confirms that so far, about 18-plus months into the new strategy, a lot of the policies that have been implemented are actually proving effective,” Kathy Mitsui, chief Japan strategist at Goldman Sachs (GS) in Tokyo, told Bloomberg Television Monday.
The Japanese economy might therefore be able to bounce back faster from the contractionary impact of April’s tax increase. Bloomberg economist Tom Orlik points to data showing a big increase in spending by Japanese companies. “The very, very rapid growth in private nonresidential investment is a pretty positive sign for the underlying trajectory for the economy,” he says.
“The hope for Abenomics was that lowering borrowing costs, increasing profitability, and opening up investment opportunities through structural reform would catalyze a new round of capital spending by Japanese firms,” Orlik says. “That would increase the economy’s capacity to produce, and that’s how you boost long-term growth. It is early days, but I take confidence from the data.”
Read more/ Source: http://www.businessweek.com/articles/2014-06-09/the-tax-increase-isnt-killing-japans-recovery