The increase of the VAT rate on April the 1st was an important event in Japan but also for the world economy. The success or failure of the Abenomics was partly dependent on the impact of this increase on Japanese consumers’ behavior. We now have figures from department stores’ sales in May.
One month ago I did a first evaluation of the higher VAT rate on sales (here in French for department stores and here in English for retail sales). This post is an update.
In April department stores’ sales dropped dramatically after the VAT rate hike. March figures were strong in anticipation of this increase.
This dynamics was the same than in 1997 during the previous VAT increase.
Is there a difference in May?
I have used two charts to catch the VAT impact.
In the first I show department stores’ sales. The red parts of the line are 1997 and 2014 episodes. The two red profiles are the same. In April this year, the year on year change in department stores’ sales was -12.5%, it was -12.3% in 1997. In May 2014 the drop was -4.37% compared to -3.3% in 1997. The current episode is marginally more sanguine than in 1997.
We can differentiate the sales location between the six largest Japanese cities and the rest of Japan. That’s what is shown on the second chart. The two episodes have the same profiles.
In 1997, demand after the VAT rate increase was a drag to GDP growth. The impact had a strong persistence and at the end pulled down the economy in recession. The rebound that had been seen during the summer of 1997 in industrial production  was just temporary because demand was too weak.
Will the scenario be the same this year? I would not bet the contrary