TOKYO – Last April, Japan’s government implemented a long-planned consumption-tax hike, from 5% to 8%, the first in a two-step increase that is expected to bring the rate to 10% by 2015. The hike – a key feature of “Abenomics,” Prime Minister Shinzo Abe’s three-pronged strategy to revive Japan’s economy – signals the government’s long-term commitment to fiscal consolidation. But it has also dealt Japan a heavy macroeconomic blow.
Preliminary GDP data show a 6.8% contraction year-on-year in the second quarter of this year – the largest since the 2011 earthquake and tsunami that devastated the country. Moreover, consumer spending fell by a record amount, contributing to a total real (inflation-adjusted) decline of 5.9% from last July.