Updated: 02/17/2014 19:33 | By Agence France-Presse

Slowing Japan economy stokes tax-rise fears

Japan's economy slowed to a crawl in the last quarter of 2013, data showed on Monday, exacerbating fears that an April sales tax rise will derail Prime Minister Shinzo Abe's bid to stoke growth after two decades of deflation.

Slowing Japan economy stokes tax-rise fears

Japan's economy logs its best performance in three years, but weak second-half growth and a sales tax rise are denting hopes for a sizzling 2014 - by Yoshikazu Tsuno

While the world's number three economy grew 1.6 percent over last year -- its best performance in three years -- it slowed to 0.3 percent in the October-December quarter, presenting a major challenge for Abe and his much-touted policy blitz, dubbed Abenomics.

The lacklustre fourth-quarter growth was far lower than the 0.7 percent widely expected by economists, according to a Nikkei business daily survey.

And the full-year figure only modestly beat Japan's expansion in 2012 before Abe launched his bid to restore the country's fading status as an economic superpower.

Since the conservative Abe swept national elections in late 2012, the yen lost about a quarter of its value against the dollar -- giving a boost to Japanese exporters.

The Nikkei shares index soared 57 percent in 2013, its best performance in more than four decades, while Japan's growth led G7 nations in the first half of last year.

Critics, however, fear that the controversial sales tax rise to 8.0 percent from 5.0 percent -- seen as crucial for cutting Japan's eye-watering national debt -- would curtail the budding recovery in an economy beset by years of deflation. Data released last month showed Japan's consumer prices logged their first rise for five years in 2013.

Lacklustre exports were largely to blame for the slowing growth, said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"The Abenomics scenario of a cheaper yen leading to higher exports and higher consumption has not materialised," Shinke told AFP.

"The lower yen has boosted stock prices, which propped up consumption. But export growth has not been strong."

Japan is also saddled with ballooning trade deficits owing to a surge in energy imports after the tsunami-triggered Fukushima nuclear disaster in 2011.

Abe has called on firms to hike wages as consumers face higher prices for ordinary goods, while many complain they have yet to reap the benefits of the growth campaign.

Tokyo also launched a special $50 billion stimulus package to counter any downturn from the nation's first sales tax hike since the late nineties, which shortly preceded years of tepid growth.

- Consumers still cautious -

Abe said Monday that springtime labour negotiations would likely generate widespread wage hikes, although there has been little evidence so far of big pay or capital spending rises.

"We expect that the trend of rising salaries will expand more than last year," Abe told parliament. His point man on the economy, Akira Amari, added that "domestic demand remains in a good shape".

"The economic trend is pointing upward, led by private-sector demand," the economy minister told reporters.

Consumer and corporate spending in the latter half of the year failed to take off, underscoring a still-cautious mood among households and in the country's boardrooms.

"Last-minute spending to avoid the higher sales tax will likely lead to an acceleration in demand in (the first quarter), followed by a slump in the second quarter," Capital Economics said.

The strength in overseas economies, particularly the United States, will be a key factor for Japan's economy this year, Dai-ichi's Shinke added.

"It would reasonable to expect further growth as overseas economies are expected to fare better this year," he said.

Separately, revised December factory output data Monday came in at 0.9 percent from a month earlier, weaker than a preliminary 1.1 percent expansion.

But the tax rise is perhaps the biggest threat to Abe's efforts and has led to speculation the Bank of Japan (BoJ) would be forced to expand its already unprecedented monetary easing drive later this year to counter a slowdown.

The programme launched by the BoJ, which kicks off a two-day meeting on Monday, is a cornerstone of Abe's policy, meshing big government spending and central bank easing.

It also calls for deeper reforms, most yet-to-be-seen, including free-trade deals, more flexible labour markets and bringing more women into the workforce.

The Japanese economy grew 1.4 percent in 2012 and contracted 0.5 percent in 2011 as the country was hammered by the quake-tsunami disaster and subsequent nuclear crisis.

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