The Wrath of Abenomics: Sales Collapse, Inflation Soars

Wolf Richter's picture

Wolf Richter

Even the soothsayers and Abenomics spin doctors expected a downdraft after Japan’s consumption tax was jacked up to 8% from 5%, effective April 1. But not this.

The tax hike had been pushed through parliament by Prime Minister Shinzo Abe’s predecessor. It was supposed to save Japan. But no one wants to pay for government spending. The tax proved to be so unpopular that Prime Minister Noda and his government were unceremoniously ousted at the end of 2012.

Japan is in terrible fiscal trouble. Half of every yen the government spends is borrowed, now printed by the Bank of Japan. Expenditures can’t be cut, apparently, and government handouts to Japan Inc. had to be increased. Yet something had to be done to keep the gargantuan deficit from blowing up the machinery altogether, and it was done to those who spend money.

The consumption tax is very broad, impacting goods and services bought by businesses and individuals, from haircuts and vegetables to construction materials. So the 3-percentage-point increase would be levied on much of the economy.

But here is the thing: money that people and companies keep in the bank earns nearly nothing, and even a crappy 10-year Japanese Government Bond yields less than 0.6% per year. But if buyers frontloaded major purchases by a few months or even a year to beat the consumption-tax increase – buying that refrigerator or heavy-duty truck a year earlier than they normally would, for example – they’d save 3% of the purchase amount. That’s pure income. And tax-free for individuals. The biggest no-brainer in Japanese financial history.

Every company and individual frontloaded whatever was sufficiently practical and substantive, and whatever they could afford. It started late last year and culminated in the January-March quarter. As a result, GDP soared at an annual rate of 5.9%, a phenomenal accomplishment for Japan.

The Japanese have been through this before. Ahead of the prior consumption-tax hike from 3% to 5% effective April 1, 1997, consumers and businesses went on a buying binge of big-ticket items. The economy boomed for a couple of quarters, then woke up with a terrific hangover as spending on durables by businesses and consumers ground to a halt, and the economy skittered into a nasty recession that lasted a year and a half!

But this time, it’s different. On March 23, about a week before the tax hike would take effect, the Nikkei polled corporate executives as they were still floating on a sea of optimism from all the money that rampant frontloading was bringing in faster than they could count. They weren’t concerned: 70.2% said that sales would remain stable or decline no more than 5% in fiscal 2014, which started April 1; 55.4% said the economy, supported by strong consumer spending, would improve by September, and 74.3% saw that happening no later than December. So no big deal.

Alas, the Ministry of Economics, Trade, and Industry just released a dose of reality. Total retail sales in April plunged 19.8% from March and were down 4.4% year over year. But this includes sales of perishable and small items not suited for frontloading, and convenience-store sales (which rose a smidgen). In stores where people buy durable goods, such as appliances, watches, or cars, sales were awful.

At “large retailers,” sales swooned 25.0% from March and 5.4% year over year. At supermarkets, where people also buy some durable goods, sales fell 3.9% year over year – people even stocked up on non-perishable food and beverages. At department stores, where people buy jewelry, designer clothing, or French purses, sales fell 10.6% year over year. It wasn’t just retail. Sales between businesses – nearly 2.5 times the value of retail sales – plunged 20.4% from March and 3.7% year over year. In short, it was the largest decline in sales since March 2011, when the Great East Japan Earthquake and tsunami that killed over 19,000 people, brought commerce to a near-standstill.

Those sales were in prices that had been inflated by 3%. That tax-hike money doesn’t stay with the seller but is turned over to the government. In actual merchandise sales, the scenario is 3 percentage points worse. So sales at, for example, large retailers on a comparable basis dropped 28%, not 25%.

At the end of January, the Japan Automobile Manufacturers Association (JAMA) forecast that passenger and commercial vehicle sales would dive 9.8% in fiscal 2014, to 4.85 million units, the lowest since earthquake year 2011. JAMA’s prediction was pooh-poohed as catastrophist.

Turns out, the good people at JAMA are optimists; vehicle sales got demolished in April. As measured by registrations, all categories plunged: new cars, including minis (cars with tiny 500cc engines) -56.0% from March; trucks of all sizes, including minis -54.0%; and total vehicles sales, retail and commercial, cars, trucks, and buses -55.9%, from 783,384 units in March to 345,226 units in April.

It was the worst performance since December 2012 (December being historically the weakest month of the year in Japan) when the economy was still suffering from the aftershocks of the earthquake nine months earlier. Here is the chart of that epic collapse in total vehicle sales:

(An earlier version of this post showed a chart with production numbers, not sales, my error)

Most of the vehicles sold in Japan are made in Japan – despite decades of screaming by US automakers, which have yet to get their foot in the door. This means production schedules are going to get cut, hours will be reduced, component purchases will be whittled down.... It has already happened. In April, production was cut by 18% to 770k units, including export units, which are doing well. And the whole chain reaction of a large complex manufacturing sector slowing down will worm its way into the statistics over the coming months. Same as in 1997.

The slowdown will add to the slowdown already underway in business and consumer spending on durable goods. And all the hype about the phenomenal January-March quarter and how Abenomics was performing miracles, and how consumers were finally starting to spend is already turning into furious spin-doctoring as economists are fanning out to explain that this time, it’ll be different, that April was just a blip, that all this frontloading won’t lead to a long recession, as it did last time.

And on May 30, the hapless Japanese consumers woke up to find out officially what they’d already figured out on their own: inflation in April had soared 3.4% for all items from a year earlier, with goods prices up a dizzying 5.2%. But their incomes have been stagnating. The wrath of Abenomics is hitting them: inflation without compensation. Inflation mongers will be ecstatic, but this can’t possibly be good for the Japanese people, or the economy. 

China’s actions “discourage” Japanese corporations from doing business there, said the Japanese government, and that’s exactly what has been happening for months. In a most dramatic way and where it hurts China the most. Read..... Exodus of Japan Inc. Slams China

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No Quarter's picture

 In the short term at least,  wouldn't there be some deflation in cost of goods as retailers drop prices to encourage spending after heavy losses? If the lower prices of goods is 4% or more, it trumps the sales tax hike, no?

andrewp111's picture

From the graph, sales in Japan surge every March (except for the 11 earthquake), and then drop off precipitously. This tax only made it a little more so, and this time it was more April than March. Nothing to see here, move along.

Okienomics's picture

I noticed that pattern too. I like doom porn as much as anyone on ZH, but at least be intellectually honest about it. The drop in April is a recurring pattern. Now, does anyone know why March is such a strong month for auto purchases in Japan?

GooseShtepping Moron's picture

Does anybody here read Spike Japan? A very top-rate blogger who sadly is no longer active. He covered this material in depth way back in 2011.

Toburk's picture

Than you for providing the link to this blog.  The story of his travel to Kinugawa was enriching.

F-X's picture

I started in business in the 80s, dealing mostly with Japanese companies. Their manufactured products were so impressive - totally dominating my industry. 

I realized their real estate was overpriced, and their farmers overprotected, but everything else about their economy seemed solid to me.

I just never imagined the country would come to this.

AdvancingTime's picture

 Japan continues to slide towards an economic abyss with each passing day. The writing is on the wall. Japan is facing a wall of debt that can only be addressed by printing more money and debasing their currency. This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world.

 The moment the Japaneses stock market fails to rise enough to offset inflation this will turn into a tsunami of  money fleeing Japan and constitute the end of the line for those left holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.

MontgomeryScott's picture

It's a bitch when you accept the Western MIC in, and the monetary policies, and you get nuked by them (at your own Fukishina Dai-Ichi and Dai-Inni hands).

"I'll take a Nuclear Toyota, for 100 yen, Wang."


besnook's picture

the difference between japan and the usa is the japanese(abe) were honest about what .gov was going to do instead of doing it(inflation) and denying it is happening by using fraudulent data engineered to get the desired result, inflation with low interest rates. ask any social security pensioner if their check has kept up with the cost of living.

the initial response to higher taxes was to be expected. it should have been raised incrementally to reduce the effect. it is way too early to make any conclusions about the success or failure of abenomics, however. wait and see. however, without a rise in wages the plan is mathematically impossible it appears. some corporations have given lip service to raising wages but i don't know the details of the reality.

q99x2's picture

My suggestion is to wipe out the bondholders and start over by replacing the Japanese government with open source software.

MontgomeryScott's picture

I hear that Japanese BITCHCOIN miners are in demand right now.

Don't forget your radiation detecting meter of choice.

I'll provide the 2,000 'screaming Japeanese', via 'Cheap Trick'.

Marco's picture

Japan needs price inflation and reduced consumption ... they have been running a structural trade deficit since the tsunami.

besnook's picture

the only reason for the trade deficit is the cost of fuel to replace the nuclear reactors. japan's huge foreign reserve account(dollars) pays for it. so, so what? it doesn't matter now and wont for several more years.

MontgomeryScott's picture

Holding a foreign reserve dollar currency that publically claims that it is in a 17 TRILLION dollar DEFICIT gives me MUCH faith in the holdings of the Japanese.

You're pretty stupid, aren't you, 'besnook'?

Cycle's picture

That's like hoping for anthrax to cure your cancer.

ebworthen's picture

Raising taxes (costs) while debasing the currency causes people to cut spending?

Who would'a thunk it?  Next they'll tell us clouds cause rain.

SmittyinLA's picture

inflation soars, but NOT in housing, and they can deflate food prices anytime they want by simply allowing cheap imports.

Of course if we stuff an immigration treaty down their throat and obliterate any population decline with foregin invasion we could reverse their real estate price decline, but that would require a National Japanese cultural surrender to implement.



The Blank Stare's picture

Keep the foreigners OUT!!


They'll just stink up the place and take advantage of these harmless children

The Reich's picture

Need some anal lube?

disabledvet's picture

"Sometimes your best isn't good enough."

They still have a trillion plus in treasuries...but so does China.

john39's picture

and several U.S. military bases to ensure that Japan continues to do what it is told.

kurt's picture



OpenThePodBayDoorHAL's picture

I had one of those back in the 80's, it was cheap, just would not die, great product for a great price

I Write Code's picture

Likely that sales will slowly return to near normal over a few months.  Anyone with half a brain should have known there would be a bad month or two.

OpenThePodBayDoorHAL's picture


"Anyone with half a brain should have known there would be a bad decade or two"


ZerOhead's picture

Yup.  They may as well shut down 2/3rds of their production until demand increases.

MontgomeryScott's picture


"Likely, sales will return to half. 'Near Normal' will slowly be bad for everyone within a month or two."

That's the totally 'Keynsian' translation (for those in the circle).

Are you SURE you are 'SAT 800'? I mean, you seem to be asking questions with OBVIOUS answers.

F-X's picture

The maximum SAT score is 2400. 

The national average is 1500.

Just sayin.

williambanzai7's picture


Kuroda's a dangerous man

He's armed with a Keynesian plan

His violent attack

Left open his sack

This flaw is the death of Japan

The Limerick King

suteibu's picture

So, which one has been the most fun for you, "Loopy" Hatoyama, "Buddha" Kan, "Cold Shutdown" Noda, or "Abenomics" Abe?