Japan has cut its growth forecast for this year, pointing to weak exports, rising imports, and the impact of a recent increase in the value-added tax. Falling worker incomes also played a role.
Japan's Cabinet Office announced on Tuesday it was expecting gross domestic product (GDP) to expand by 1.2 percent this year, down from a previous forecast of 1.4 percent in March. A week ago, the Bank of Japan already lowered its outlook to 1.0 from a previous 1.1 percent.
"The latest forecast was based on weak demand overseas and stronger-than-expected imports," a Cabinet Office official said of the downward revision, adding that the cut was also "due to weak domestic demand following the consumption tax increase in April."
Consumer demand fell as Tokyo raised the national sales tax in April from 5 percent to 8 percent, the first increase in 17 years. The average of monthly consumption expenditures per household dropped 3.1 percent, the second monthly decline in a row.
Weak domestic consumer demand remains a challenge to Prime Minister Shinzo Abe's three-pronged plan , also known as 'Abenomics.' The economic policy seeks to overcome two decades of deflation by a combination of massive public infrastructure spending, monetary easing, and labor market reforms aimed at getting more women to join the salaried workforce.
Workers' households purchasing power in long-term decline
Domestic demand is constrained by a trend toward lower worker incomes. Despite some of the biggest wage increases in years for employees at some big companies, such as Toyota, the average income of salaried households continued to drop for the eighth consecutive month.
In inflation-adjusted terms, workers' incomes fell 4.6 percent in May compared to the same month a year earlier, to an average 421,117 yen ($4,160, or 3068 euros). This is part of a long-term trend - most working families' incomes have been declining since 1997.
Tax hike aimed at Japan's outsize public debt
April's value-added tax hike was aimed at taming the growth of Japan's massive public debt, which exceeded one quadrillion yen in 2013. The public debt-to-GDP ratio reached 227 percent, among the highest in the industrialized world, and more than twice the OECD average. Most of the debt is held by Japanese households, which traditionally maintain a high savings rate.
nz/uhe (AFP, dpa)