May 29, 2014 / 12:50 AM / 6 years ago

Japan April retail sales tumble after tax hike, rebound may take time

TOKYO (Reuters) - Japanese retail sales fell in April at their fastest pace in three years due to declining sales of cars and electronics, offering the first indication of how much consumers are trimming their purchases after a sales tax hike took effect on April 1.

A shopper walks in a clothing retail store at Ginza shopping district in Tokyo April 28, 2014. REUTERS/Toru Hanai

The 4.4 percent annual decrease in retail sales was more than the median estimate for a 3.3 percent decline, and marked the biggest drop since a devastating earthquake and tsunami in March 2011.

In one encouraging sign, declines in sales of apparel and toiletries were limited, which suggests consumer spending will pick up in May in line with the Bank of Japan’s scenario, but there are worries that a recovery in durable goods could take more time.

“There are signs that declines in spending on daily necessities is already bottoming out, which supports a gradual recovery in spending,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“The one area of concern is durable goods. Sales of these more expensive items may take more time to recover.”

The government raised the nationwide sales tax to 8 percent from 5 percent on April 1.

The move is intended to earn extra income for rising welfare costs, but it has also caused some volatility in economic data and concern that the world’s third-largest economy will enter a prolonged contraction if consumers shun higher prices.

BOJ officials have repeatedly said any negative impact from the sales tax hike will be temporary and that the economy can continue to expand above its potential growth rate despite recent signs of slowing.

Indeed, most economists are optimistic that mid-year bonus payments will help consumer spending turn around.

The government is also bringing forward public works spending to give the economy an extra boost this year so it can quickly bounce back from the tax hit.

Nonetheless, some advisers close to Prime Minister Shinzo Abe think the BOJ will need to add to last April’s massive stimulus to ensure consumer prices reach the central bank’s 2 percent inflation target.

The last time the government raised the sales tax in April 1997, retail sales rose an annual 12.4 percent in March and fell 3.8 percent in April. Retail sales remained weak for the remainder of that year as the economy skidded into recession.

Many politicians blame the tax hike for the recession that followed, but others argue that the Asian financial crisis was a bigger contributor to Japan’s economic downturn.

Editing by Shri Navaratnam

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