Decrease in consumer spending impacts Japan’s 2Q GDP

On Wednesday, August 13, Japan’s second quarter real gross domestic product (or GDP) decreased by 6.8%—the steepest contraction since 2011. The main reason for the contraction can be seen as April’s hike in consumption tax from 5% to 8%. This caused a drag on consumer spending. There were other reasons why Japan’s national output slowed down.

Japanese Prime Minister, Shinzo Abe, has been successful in weakening the yen against the dollar. This has boosted exports. The burgeoning cost of energy imports has impacted the economy. Despite the wage hikes following major firms’ improved earnings, people’s net income has declined. As a result, Japanese consumer spending plunged by 5% in 2Q14.

Why the decrease in consumer spending impacted Japan’s 2Q GDP

Consumer spending plunged by 5%

Although households had stocked up ahead of the tax increase, they felt the pressure of higher prices. In Japan, consumer spending accounts for over 60% of the gross domestic product (or GDP). GDP plunged by 5% from the previous quarter in 2014. This was the first decline in the last seven quarters. Household consumption decreased by an annualized 19.2% from the previous quarter.

Impact on business

The contraction in household spending was led by a slump in sales of consumer durables like cars and electronic products. Japanese companies like Canon (CAJ), Honda (HMC), and Toyota (TM), and exchange-traded funds (or ETFs) investing in them—like the iShares MSCI Japan ETF (EWJ) and the WisdomTree Japan Hedged Equity Fund (DXJ)—were impacted. However, many Japanese companies produce and sell abroad. Japan’s large manufacturers reported strong earnings in the second quarter despite weaker domestic demand.

Besides a decrease in consumer spending, the extent of contraction suggests that there were other factors that caused Japan’s decrease in GDP. The next part of this series discusses the other factors that weighed heavily on Japan’s second quarter GDP growth.

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