Japan Automotive Sales Down By 5.5%...And That’s Good News

As expected, after the increase of consumption tax in Japan effective 1 April 2014, automotive sales declined 5.5% year-on-year to 345 226, the lowest number the industry has achieved since December 2012.

This, however, is good news. Analysts had predicted that the tax hike, from 5% to 8%, would effect a more severe decline. Research firm, IHS Automotive, forecast that auto sales would drop 18% in the second quarter of 2014 compared to the same period last year. According to Senior Analyst, Satomi Hamada, the April results were much better than expected. Furthermore, when Japan last raised sales tax back in 1997, by only 2% compared to 3% this time around, vehicle sales had dropped by 15% in April of that year.

Nonetheless, some parties are more skeptical, proposing that the April numbers were artificially heightened due to binge-buying before the increased tax enforcement coupled with poor weather that resulted in late deliveries. Deliveries in March rose to an eight-month high of 783 000 units. The situation could take a severe turn come May and June, and automakers are bracing for a year-long slump. 

Abe testing out Nissan's self-driving car

Why hike the tax?

Japan’s public debt amounts to approximately 230% of its GDP and the consumption tax increase is an effort to keep it under control. This situation takes place against a backdrop of ageing population that has augmented social welfare expenditure; low birth rates has led to the country having the highest ratio of elderly retired to young and able citizens, which could be a hindrance to the country’s future economic development. The tax increase could also help finally nudge Japan out of deflationary cycle to its 2% inflation target.

Prime Minister, Shinzo Abe, who took office in December 2012, will have to decide if he wants to enforce Phase Two of the hike in October 2015, bringing the tax further up to 10%. Experts believe that the hikes this time around will not have the recessionary effect as 1997, as Japan’s economy is much stronger now after 16 months of Abenomic reforms (read also: Japanese Autoworkers Want a Slice of the Abenomics Pie).

image: japantimes.co.jp