Is Japan recovering from the VAT rate hike of Avril the 1st? Not really when we look at July numbers on retail sales. (see here for a detailed analysis of Q2 GDP drop). Retail sales are down again in July and the current sales profile is clearly weaker than in 1997 during the previous VAT rate hike: sales were up in July 1997, down in 2014.
In 1997 the rate hike led a to a long recession. With a weaker dynamics the probability of a long recession is clearly above 50%. The drop in households purchasing power continues and in the absence of structural reforms there are no reasons for a rapid upturn.

The first chart shows the retail sales index in volume.
On the chart we see that in March, before the VAT rate hike, retails sales peaked before a dramatic drop in April. What is surprising is the absence of rebound. Usually with this type of shock there is a rebound. This is not the case in this episode. We can wonder if in 1997 there was a rebound? That’s what is shown in the second graph. It presents the annual change in department stores’ sales. Sections in red are the two VAT rate hike in 1997 and 2014. We see a rebound in 1997, not in 2014.
Households behavior has change between 1997 and 2014. The source can be search in the purchasing power momentum. On the third chart it drops dramatically. In the absence of structural reforms that could change the mid-term horizon, there are no strong reasons for households to spend more.
The Japanese recession is here to stay.