Vehicle sales in Japan have declined to the lowest levels in almost two years, as tax hikes imposed by Prime Minister Shinzo Abe kicked in. The increase in consumption tax is the first of its kind in Japan in over 17 years, causing vehicle deliveries to come tumbling down.
Abe has been struggling to get the world’s biggest debt burden under control, and the increase in consumption tax from five to eight percent in April is a part of his plan. It had caused automobile sales to soar in the seven months before the hike, but now there are fears that the increased levy will cause a fierce consumer backlash.
As this type of spending dwindles, Japan may face the biggest economic compression it has seen since the earthquake and tsunami struck the coast three years ago
Vehicle deliveries in the island nation dropped 5.5 percent year-on-year in April, according to industry data. “We are likely to face a very tough situation in May and June in terms of new orders,” Yoshitaka Hayashi, director of the Japan Automobile Dealers Association told reporters at a press conference.
The decline has brought sales down to their lowest levels since 2012. According to research firm IHS Automotive, automotive sales in Japan are likely to drop by as much as 18 percent between April and June, compared to the same period last year.
The disappointing figures, however, may be symptomatic of a much bigger problem. Since the tax hike was announced, consumers have been preparing for the increase by buying bigger items, artificially inflating spending figures in the months leading to April.
According to government figures household spending in March peaked to the highest levels since 1975, as consumers binged ahead of the tax hikes; despite real disposable income for working families dropping by 3.2 percent.
As this type of spending dwindles, Japan may face the biggest economic compression it has seen since the earthquake and tsunami struck the coast three years ago.
“It is difficult to tell at this stage whether the economy is doing better than we had expected, or whether the remaining orders had played a big role,” IHS senior analyst Satomi Hamada told Reuters. Historically, however, the last time consumption tax was raised in 1997 from three to five percent, automobile sales dropped 15 percent over the following 21 months.