Prime Minister Shinzo Abe’s economic goals are to reverse nearly twenty years of deflation in the Japanese economy, inject a modest level of inflation (the target is 2%) and restore the economy to growth. Japan is faced with a demographic time bomb in that the birth rate is low and many Japanese workers will be retiring (the baby boomer generation), placing stress on social security budgets. This means that the exchequer faces a reduction in receipts (as the workforce shrinks) and an increase in costs (as more Japanese retire, draw pensions and increasingly call on health care and social services).
In order to partially meet these challenges, sales tax was increased from 5 to 8% in April. This generated a spending rush in March as people bought goods before the rise kicked in. Analysts believe that the real level of inflation, stripping out the rush, stands at 1.3%. With domestic consumption accounting for 60% of Japanese economic output, retail sales represent a critical component of the economy. In June, retail sales had fallen back by 0.6% on the June 2013 figure, but the July data showed a modest rise of 0.5%. For the quarter to June, the economy contracted by 1.7% over the Q1 figure. However, analysts expect that Japan will return to growth in Q3 with estimates around the 2.5% mark. A second increase in sales tax is slated to come into force in October next year, pushing it up to the 10% mark.
Wages grew for some workers in July, with the payment of summer bonuses pushing pay up by 7.1% over the July 2013 level. Whilst base pay is not expected to rise sharply, the increase ought to be enough to nudge consumer spending up. Cash earnings for labourers were 2.6% higher in July, beating expectations that they would slip back by 0.9%.