Japan tax hike boosts inflation, hurts spending

Inflation hit a three-decade high and unemployment dipped further in Japan, data showed Friday, as the government's bid to jumpstart the economy takes hold, but analysts warned it was too early for celebrations.
Japanese consumer inflation, stripping out volatile fresh food prices, rose 3.4 percent year-on-year in May, the fastest pace in 32 years, according to data from the internal affairs ministry.
The rise, which matched market expectations, was largely driven by a consumption tax hike in April that took the rate from 5.0 percent to 8.0 percent.
Other data from the ministry showed household spending plunged 8.0 percent in May on-year after a pre-rise shopping spree.
The tax rise was seen as crucial for shrinking Japan's mammoth national debt, proportionately the worst among wealthy nations. However there have been fears it will derail a budding economic recovery by taking a bite out of consumer spending.
Separate data from the ministry of economy, trade and industry seemed to bear that out, showing retail sales edged down 0.4 percent in May following a 4.3 percent fall in April.
But economists say the downturn in consumption in the aftermath of the tax rise was largely a simple displacement.
Consumers had gone on a spending spree ahead of the first sales tax jump in 17 years, snapping up everything from big-ticket items such as cars and refrigerators to everyday goods like toilet rolls and rice.
Takeshi Minami, economist at Norinchukin Research Institute, told AFP that "the belief is that the drop will be temporary and that labour shortages in some sectors will continue".
Other official data showed Japan's jobless rate edged down to 3.5 percent in May, the lowest level in nearly 17 years. The jobs-to-applicants ratio stood at 1.09, the highest in more than two decades, meaning there were 109 job offers to every 100 job seekers.
The improved ratio and unemployment figures will add pressure on firms to raise wages to attract workers, said Junichi Makino, economist at SMBC Nikko Securities.
"That's good for households, and will also help add to inflation," as companies have to raise prices to account for higher wages, he said.
There are about one million workers who can still join the workforce and "companies will only be able to attract those workers with higher wages," he told Dow Jones Newswires.
Minami of Norinchukin said that with the latest data the government and the Bank of Japan can afford to maintain a wait-and-see stance for now.
But he added it was important to watch whether wages will increase to make up for the higher sales tax as the employment situation is tight only in limited sectors such as construction, retail and services.
Prime Minister Shinzo Abe indicated the Japanese economy has coped well with the tax hike but said "it is too early to give such a verdict".
Excluding the effect of the higher tax on prices, Japan's core consumer prices were estimated to have risen 1.4 percent in May, just below a 1.5-percent increase for April.
Capital Economics said in a note that it believed "underlying inflationary pressure has eased".
The sluggish spending data also prompted Credit Suisse to say it now sees a risk that April-June quarter real-term personal consumption would be weaker than expected.
"It has appeared that personal consumption correction (after the tax rise) has been deeper than the 1997 episode" when the rate was raised to 5.0 percent from 3.0 percent, it said in a report, adding the continuing sluggishness of wages was an issue.
The Bank of Japan is aiming at 2.0 percent inflation, excluding the tax hike effect.
Abe's government has put conquering deflation and stoking growth in the world's third-largest economy at the top of its agenda with a policy blitz dubbed "Abenomics".