Figures released for Japanese factory output in February show that it unexpectedly fell back by 2.3% on January’s output. The result took analysts by surprise because it was the first decline seen in three months and it had been anticipated that output would rise to meet strengthened domestic demand ahead of a sales tax increase that comes into force today. In January, factory output was up by 3.8% on the December figure and analysts had expected the trend to continue until the sales tax rise bites, at least.
Japan has the worst public debt to GDP ratio of any major economy; it’s estimated to stand at 227% of the nations GDP, roughly $10 trillion. It faces a demographic time bomb as its birth rate has fallen to 1.39 children per woman (2011), meaning that the population is in decline, whilst people are living longer. As people age, they inevitably need greater levels of healthcare provision the cost of which is met by those in work, hence social security costs (a major budget component) will rise. The nation continues to rely on imports of LPG to meet electricity power production needs, with nuclear capacity off-line, leading to balance of trade deficits.
Partially as a mechanism to fund debt reduction and/or boost receipts for meeting social security spending, Japan is bringing in its first rise in sales tax for 17 years. When the sales tax increased from 3 to 5% in 1997, the country fell into a lengthy recession although this was not the cause. From today, the sales tax will increase to 8% and will climb to 10% in October of next year.
The Japanese government is trying to draw a line under years of deflation in the economy and is targeting an inflation level of 2% in the hope that the knowledge that prices will rise will boost domestic demand. However, a raft of unimpressive economic indicators is boosting speculation that the Bank of Japan may further ease monetary policy by injection of more liquidity into the economy shortly.