Japan’s Retail Sales Plunge After Sales Tax Hike, Typhoon

(Bloomberg) -- Japanese retail sales plunged in October after a sales tax hike and a super-typhoon kept shoppers at home, a worse-than-expected outcome the government will need to consider as it mulls the size of a spending package to support growth.

Retail sales fell 14.4% in October from a month earlier, more than the drop suffered after a similar tax increase five years ago and the worst drop on record for economy ministry data stretching back to 2002. Economists had forecast a 10.4% decline in sales. Speaking after the release, analysts said the effect of the extreme weather had been larger than initially thought.

Car and appliance purchases slid by double-digits. Sales were also hurt by a drop in overseas tourists including visitors from South Korea, which is embroiled in a diplomatic spat with Japan, according to an economy ministry official

Key Insights

• The Abe administration wants to avoid a repeat of 2014, when a previous tax increase caused a collapse in consumer spending and a 7.3% contraction in quarterly growth. After that tax increase, retail sales dropped 13.7% month-on-month.
• Azusa Kato, an economist at BNP Paribas SA, said October’s spending slide probably isn’t a reason for excessive concern because the drop was exacerbated by the super-typhoon, which kept shoppers home during a long weekend. “There is no doubt that the economy will shrink this quarter, but I expect a pick-up after that,” she said.
• “I don’t think today’s data will prompt politicians to call for a bigger stimulus package. They don’t want to say consumer spending is so bad that stimulus is needed because that would means they messed up their handling of the tax hike,” said Atsushi Takeda, chief economist at Itochu Research Institute.
• Economists are forecasting 4Q GDP will shrink 2.7% in the current quarter, as a raft of government measures, including tax breaks on car and home purchases, soften the blow compared with 2014. The International Monetary Fund on Monday said those policies were working, but called on the government to keep them in place longer.
• Consumer spending has been especially important to Japanese growth this year as global trade tensions and cooling tech demand have weighed on exports.

What Bloomberg’s Economist Says

“The sharp pullback in retail sales in October following the sales-tax hike raises concern that consumer spending is more fragile than we expected. The blow to spending from a powerful typhoon was also at play, so the data probably overstate the weakness. Even so, sales of durable goods slumped hard -- in contrast to relative resilience seen in earlier data on spending on daily necessities.”

--Yuki Masujima, economist

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• Retail sales fell 7.1% in October from a year earlier. Economists expected a 3.8% drop.
• Department store and supermarket sales fell 8.2%, versus a forecast decline of 7.1%.
• Purchases of cars dropped 17% from a year earlier; sales of appliances fell 15%, according to the ministry.

--With assistance from Toru Fujioka and Emi Urabe.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jason Clenfield, Paul Jackson

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