Japan’s Sharp Contraction Sends Global Warning About Tax Hikes

The Japanese economy shrank at an annual pace of 6.3 percent last quarter after a consumption tax hike crushed consumer spending.

Domestic demand fell in the quarter at an annual pace of 8.0 percent, seasonally adjusted economic data released Monday by Japan’s Cabinet Office showed Monday.

The government hiked a consumption tax from 8 percent to 10 percent in October. The negative impact from that tax hike was much larger than expected. Retail stores have reported a decline in sales akin to that seen at the height of the 2008 financial crisis.

The figures for the final three months of 2019 were much worse than the 3.7 percent decline forecast by economists. The deep dive makes it far more likely that the economy will be in contraction again in the first quarter of 2020, meaning Japan would technically be in a recession. Most economists define a recession as two consecutive quarterly contractions.

The contraction in Japan may offer a sobering lesson for the U.S., currently experiencing its longest-ever economic expansion. All of the Democratic candidates have proposed tax hikes of various sorts, and all assume that having the government sweep more money out of the private sector would not be a drag on economic growth. While some of the tax proposals, such as a wealth tax on billionaires, would not likely have a broad effect on domestic demand, other taxes would. Several Democrats have proposed consumption taxes in the form of gasoline tax hikes and value-added taxes that would hit demand.

Japan’s gross domestic product, or GDP, the sum of the value of a nation’s products and services, slipped 1.6 percent in the last three months of 2019 quarter-on-quarter. The annualized rate shows what the drop would have been if that same pace had continued for a year.

The contraction for the October-December period was the first Japan had in more than a year. The amount of decline was the worst in about five years. The news sent the Nikkei 225 benchmark stock index falling in trading Monday.

Both exports and imports fell during the fourth quarter.

The coronavirus outbreak is likely to be a drag on the economy in the first quarter.  Japan had been counting on Chinese tourists in recent years to sustain growth, but visits have dwindled to a trickle. Japanese companies have halted or adjusted production, because of supply chain disruptions or work suspensions at their own factories in China.

Overall consumption is likely to drop as people avoid crowds.

“The concerns for the export focused economy is continued pressure amid the coronavirus,” said Jingyi Pan, market strategist at IG in Singapore of Japan’s GDP.

–The Associated Press contributed to this report.