Tax hike less damaging than previous ones

The available data on retail sales, household spending as well as the Bank of Japan’s consumption activity index show that consumer spending fell broadly as much in October as in April 2014, when the sales tax was raised from 5% to 8%. Even so, our estimates point to a 1.8% quarterly drop in consumption in the current quarter. That would be much smaller than the 4.8% q/q plunge in Q2 2014 and less severe than the 2.4% q/q drop after the 1997 tax hike and in line with what we are forecasting. While durable goods spending probably fell more sharply this time around, the government’s decision to freeze the tax rate on food and non-alcoholic beverages seems to have resulted in a much smaller drop in non-durable spending. And because the impact of the recent tax hike on overall consumer prices was muted, services consumption will probably rise this quarter.