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Breakingviews: Japan economy slammed by sales tax, debt

Sunday, November 16, 2014 - 02:11

Still reeling from April's sales tax hike, Japanese GDP registers another quarter of contraction, but Breakingviews' Peter Thal Larsen argues Abenomics has even more to worry about.

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(SOUNDBITE) (English) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "It's not often that you can describe a set of quarterly GDP numbers as shocking, but in Japan's case the numbers that it has just published for the third quarter fit that description. Whereas people were expecting the economy to rebound after the shrinkage in the previous quarter, it's actually fallen 1.6 percent year-on-year. And the result of that is that people are still very much in Japan responding to this higher sales tax which has really taken a lot of people by surprise. "Now this has a couple of implications. The first thing to say is that it's the second time in 17 years that Japan has raised its sales tax only to tip the economy into recession. And that means that any plans, or any hopes that Japan might increase its sales tax again in 2015 as is currently planned, now look very questionable indeed. I mean the expectation is that Prime Minister Shinzo Abe will cancel that increase in the next couple of days. "But actually this has much bigger implications because the original plan was for Abe to maybe delay the sales tax increase. I think now, people will begin to ask the question 'is there any way in which Japan can absorb a higher sales tax increase and not have a big - suffer a big setback in the economy?' And that then raises some issues about Japan's fiscal position, its overall government debt position because really, all of Abenomics and the attempt to try and sort of increase inflation and get the economy going again is also designed, in the long term, to make Japan better able to service this huge debt load that it has: about 250 percent of GDP. And if it cannot increase taxes without sending the economy into a tailspin, the long term question is what, if anything, can Japan do to get its debt under control. At the moment, that looks like an increasingly distant dream."

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Breakingviews: Japan economy slammed by sales tax, debt

Sunday, November 16, 2014 - 02:11