Despite being geographically isolated from the global geopolitical tensions, Japan is going through the hard times. According to the latest data of the Cabinet Office, Japan's gross domestic product contracted 6.8% on year in the first quarter of 2014. The reading marked the economy's worst decline since the disastrous earthquake and tsunami in early 2011. Indeed, the similar GDP print was recorded in the period from January through March 2011, when Japan’s economy plummeted 6.9% due to the catastrophe at the Fukushima nuclear power plant. Considering the growth dynamic on a quarterly basis, GDP dipped 1.7% in Q1 as compared to Q4 of the previous fiscal year (from January through March 2014). Most experts attribute such a contraction mainly to a sharp decline in consumer spending following the implementation of a consumption tax hike in April. The sales tax was lifted to 8% after 5% which had been valid for 17 years. Such a big tax hike was one of the key points of the reforms introduced by Japan’s Premiere Shinzo Abe. In his vision, the tax hike was expected to overcome deflation. However, it caused a temporal consumption plunge and slowdown of the economic growth. “Collapse in the economic activity last quarter is mainly due to the consumption tax hike. However, we still believe the economic recovery is to resume its growth in H2,” a senior analyst from Capital Economics commented on the current doldrums. It should be noted that the actual GDP figure in Q1 beat forecasts for a more serious drop of 7.1%. Importantly, implementing the so-called Abenomics policy, the Japanese government is about to raise the sales tax even higher – to 10%. This way the government aims to tackle the problem of curbing the public debt load.
