August 6, 2013 / 5:56 AM / 6 years ago

Japan recovery seen sustained on Abenomics, may justify tax hike

TOKYO (Reuters) - Japan’s economy likely grew an annualized 3.6 percent in April-June to mark a third straight quarter of expansion, a Reuters poll showed, adding to growing signs the positive effect of premier Shinzo Abe’s reflationary policies is spreading.

Pedestrians stand in front of a stock quotation board displaying various stock prices outside a brokerage in Tokyo July 29, 2013. REUTERS/Yuya Shino

The reading will give the government justification to go ahead with a planned sales tax hike next year, although the decision will take longer and involve many other factors given its political sensitivity, analysts say.

While growth will slow from 4.1 percent seen in the first quarter, it will be broad-based with a pickup in exports and capital expenditure adding to the strength in personal consumption, they say.

“It’s a well-balanced expansion with both domestic and external demand strong. It’s a sign the effect of Abe’s policies is spreading,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.

The data, due out next Monday, will show the economy grew 0.9 percent in April-June on a quarter-to-quarter basis with external demand adding 0.2 percentage point to growth, according to the Reuters poll.

Private consumption likely rose 0.5 percent from the previous quarter, smaller than the 0.9 percent increase in January-March. But capital expenditure grew 0.7 percent, against the previous quarter’s 0.3 percent fall, the poll found.

Japan is due to raise its sales tax in April to 8 percent from 5 percent, and to 10 percent in October 2015, as part of efforts to curb its public debt which, at more than twice the size of its 500 trillion yen ($5 trillion) economy, is proportionally the largest among major industrialized nations.

Abe has said he will decide in the autumn whether to proceed with the plan after gauging the state of the economy through Monday’s preliminary GDP data and revised figures due on Sept 9.

A separate Reuters poll showed most private-sector analysts think Abe should proceed with the tax hikes as scheduled, and believe the economy can withstand the pain.

Even if the GDP figures are as strong as projected, however, the tax hikes are hardly a done deal. While mindful of the need to fix Japan’s fiscal problems, Abe is worried about derailing a fragile economic recovery and has ordered a study of alternatives to the planned two-stage increases, sources say.

“A strong GDP figure may heighten expectations that the tax hikes will proceed as scheduled. But that’s a decision only Abe can make,” said Shinke of Dai-ichi Life Research.

“What’s more important than past GDP figures is how the economy will perform if the tax rate indeed rises. At this stage, that’s very difficult to predict.”

($1 = 98.5900 Japanese yen)

Editing by Eric Meijer

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