"Consumer sentiment has been undermined to a large extent by rising prices. We expect a major retreat in sentiment from April as the tax hike drives inflation."
- Naohiko Baba, Goldman Sachs Group Inc. economist
Can Japan's consumers cope with effects caused by the consumption tax hike made on April 1? This question has been torturing minds of analysts and policymakers for quite a long time already. Shinzo Abe's policies boosted both growth and consumer prices, however, it seems that effects caused by Abenomics are already waning, while the Bank of Japan is reluctant to make any fresh steps.
Each report from the world's largest economy will have a stronger impact on the markets, as the central bank monitors economic performance to calculate the perfect timing for another strike. Therefore, it was rather surprising that a release of consumer confidence had almost no impact on the Yen. The Cabinet Office said a gauge of the mood among Japanese consumers eased to 37.5 in March from 38.5 a month earlier, hitting the lowest since August 2011. Despite a drop in sentiment, almost 90% of respondents expect a price increase over the next 12 months, the highest in comparable data back to 2004.
Each set of disappointing data adds more pressure on Abe, who risks the public souring on his campaign to sustain a stable growth as amid rising prices, wages still stagnate. A drop in confidence can result in weaker spending, and make it even more difficult to drive a rebound from a contraction forecast in the second quarter.
© Dukascopy Bank SA