Japan's economy still reeling after sales tax hike

Mall sales dropped 4.2%.

According to DBS, the consumption and trade data out yesterday showed that the economy has remained weak one month after the sales tax hike. Department store sales continued to fall -4.2% YoY in May, although the extent of decline has narrowed from April’s -12.0%.

This exactly followed the data trajectory during the 1997 sales tax hike when department store sales dropped -5.1% in May after
plunging -14.0% in April.

Here's more from DBS:

So far, there is no conclusive evidence demonstrating that the recovery in consumption from the post-tax hike slump is stronger than that in 1997.

Back in 1997, consumption indicators rebounded only slightly on the month-on-month seasonally adjusted basis in May. In the full period of Apr-Jun97, private consumption expenditures contracted sharply by -13.2% (QoQ saar).

Imports data could also validate the view that the weakness in domestic demand has extended. Imports fell further by -1.3% (MoM sa) in May on top of the -9.9% decline in April. In the year-on-year terms, imports shrank more notably by -3.6%.

Imports demand for durable consumer goods including telecommunication products, computers and passenger cars fell especially sharply in May, both on the MoM and YoY basis.

In the meantime, exports also contracted -1.2% MoM sa in May (-2.7% YoY). Trade deficit remained large as in the previous month, at JPY 0.9trn. It seems that the recent improvement in global demand (the pickup in US’s and China’s growth) has not been felt by Japan’s export industry.

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The major upside surprises in recent data came from the investment side (e.g., machine orders, construction orders). Investment is intermediate demand. In the lack of a meaningful recovery in final demand – exports and consumption, it would be questionable whether the ongoing upturn in investment activity is sustainable.