Strong GDP growth gives Abe a boost

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Strong GDP growth gives Abe a boost

Japan’s economy grew faster than previously estimated in the second quarter, aiding Prime Minister Shinzo Abe’s reflation campaign as he considers whether the nation can withstand a sales-tax increase.

Gross domestic product expanded at an annualized rate of 3.8 percent from the first quarter, higher than the initial estimate of 2.6 percent, reflecting stronger private capital investment, the Cabinet Office said in Tokyo yesterday.

The median forecast of 23 economists was for a 3.9 percent increase. The economy grew 4.1 percent in the first quarter.

Japanese stocks jumped and the yen weakened after Tokyo won a bid to host the 2020 Olympics, helping Abe’s efforts to revive the world’s third-biggest economy. Analysts from Fujitsu Research Institute to UBS AG said a sales-tax increase in April is now a “done deal,” putting the focus on how much stimulus policy makers will apply to offset the blow to consumption and growth.

“The news on the Olympics will boost Abe’s popularity and that will be another push for him to raise the sales tax,” said Daiju Aoki, senior economist for Japan at UBS in Tokyo, who accurately forecast GDP growth of 3.8 percent. “A recovery led by Abenomics is accelerating. The effect of a weak yen is improving corporate profits and that is making companies willing to boost investment.”

Bank of Japan Gov. Haruhiko Kuroda last week signaled that policy makers can use extra fiscal and monetary stimulus to offset any hit to growth from the sales tax increase and help achieve a 2 percent inflation target. Japan’s economy will contract an annualized 4.4 percent in the three months starting April after six straight quarters of expansion, before returning to growth, according to the median estimate of economists surveyed.

“The focus is shifting to how large an economic package is needed to diminish the negative impact of the tax hike,” said Aoki at UBS. “Abe will probably have to compile a fiscal stimulus package” of 5 trillion yen ($50 billion), he said.

The government could compile an extra budget next year, as there is a “high chance” that increasing the sales tax as planned may cause growth to slow, Finance Minister Taro Aso told reporters last week. The scale of any extra spending hasn’t been decided, he said.

A moderate recovery is under way and delaying an increase in the sales tax could undermine confidence in Japan’s fiscal sustainability and lead to higher government bond yields, Kuroda said last week.

The sales tax is set to rise to 8 percent in April from 5 percent, and then increase to 10 percent in October 2015, pending a final decision by Abe.

Even with a higher levy, the central bank forecast the economy will grow 2.8 percent this fiscal year through March, and 1.3 percent the following year, according to the median estimate of the board members released in July. Bloomberg
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