Chart of the Week: How well did Japan’s economy weather Q4’s tax hike?

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Fathom’s proprietary Economic Sentiment Indicator (ESI) for Japan fell to a five-year low of -0.7% in October following a hike in consumption tax from 8% to 10%. The last time this tax was increased, in 2014, economic output contracted sharply in the following quarter. To avoid a similar fallout this time, the government had announced an array of measures to soften the blow to consumers and businesses, such as exempting certain goods such as food from the higher tax rate, and offering a cashback scheme in small stores to offset the higher tax.

There are indications that those measures helped; sentiment has since rebounded to a four-month high in December, and inflation remained surprisingly low following the tax hike. The uptick in sentiment marks a pause to a two-year decline in Fathom’s sentiment measure. This uptick mirrors Fathom’s Leading Indicator, a measure of global growth expectations, which also bottomed out around Q4 of last year. This would bode well for the Japanese economy, due to its global exposure.

While the mitigating policies introduced around the tax may have reassured consumers and businesses in the immediate aftermath of the hike, they will hamper the government’s ultimate goal of stabilising its public finances in the longer term.

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