Japan's Real GDP Falls 1.6% in Q4 Last Year... Declines for the First Time in 5 Quarters

Impact of Consumption Tax Increase and Warm Winter on Consumption Contraction

Economic Contraction Expected in Q1 This Year Due to COVID-19 Aftermath

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kwon Jaehee] Japan received a poor economic report card for the fourth quarter of last year (October to December) due to the impact of the consumption tax increase.

On the 17th, Japan's Cabinet Office announced that the real Gross Domestic Product (GDP) for the fourth quarter of last year decreased by 1.6% compared to the previous quarter (July to September). If this trend continues for a year, it corresponds to an annualized decrease of 6.3%.

This is better than the performance during the previous consumption tax increase in the second quarter of 2014 (annualized -7.4%), but worse than the first quarter of 2011 (annualized -5.5%) during the Great East Japan Earthquake.

It is the first time in five quarters that Japan's quarterly real GDP, excluding price changes, has declined.

The Japanese government attributes this sluggish real GDP growth rate largely to the consumption tax rate increase (from 8% to 10%) implemented in October last year by Prime Minister Shinzo Abe's administration under the pretext of fiscal soundness.

Additionally, the impact of a large typhoon landing on the Japanese archipelago and a warm winter, which led to reduced consumption, is also considered a contributing factor.

By category, personal consumption, which is reflected in the growth rate calculation, fell by 2.9% in the fourth quarter of last year due to the consumption tax increase.

Housing investment, affected by the consumption tax hike, decreased by 2.7%, and corporate capital investment also declined by 3.7%.

On the other hand, public investment increased by 1.1%, suggesting that the public sector somewhat helped reduce the GDP decline in domestic demand.

In the fourth quarter of last year, exports decreased by 0.1%, and imports fell more sharply by 2.6%, resulting in overseas demand supporting GDP by about 0.5 percentage points overall.

Due to the impact of the novel coronavirus infection (COVID-19), Japan is expected to experience economic contraction in the first quarter of this year as well. Experts predict that the COVID-19 crisis, which struck while the effects of the consumption tax increase persist, will reduce Japan's real GDP by 0.46% in Q1 this year.

This content was produced with the assistance of AI translation services.