Japan’s second quarter gross domestic product plunged 6.8% on an annualized basis, its biggest drop since the earthquake and tsunami three years ago. This contraction is especially startling when compared to first quarter’s GDP increase of 6.7%. Japanese reporting methodology amplifies its numbers, but the trend is clear – a very strong Q1 and a very weak Q2.

The culprit of this dramatic change was the 3% increase in Japan’s consumption tax from 5% to 8% in April. Forewarned of the hike, Japanese consumers went on a strong shopping spree in March with retail sales surging 11%, and then contracting by 4% in April, after the hike. However, the punitive effect from this one-off tax bump is already diminishing, and the consensus in the market is that this was just a temporary fall. The yen’s exchange rate remains calm and the Nikkei Stock Average ended in positive territory.

The consumption tax hike is part of Prime Minister Shinzo Abe’s three core economic strategies, often referred to as the “three arrows,” borrowing from a Japanese folk tale. The first arrow was Bank of Japan’s asset purchases; the second was fiscal stimulus in public works; and the third and most difficult arrow involves incorporating structural changes to the private sector. Japan needed to raise the consumption tax to keep fiscal discipline, and offset the lowering of its corporate tax rate (which is still among the highest in the world).

Many in Japan still remember the last consumption tax hike in 1997, which resulted in total disaster, with the Nikkei plummeting and the economy plunging into another recession. This time, Abe is being more cautious; raising the tax in two steps, with the second hike, which will bring the rate to 10%, expected in October of 2015. This time there also appears to be a safety valve: If the economy starts retracting, the market believes the central bank will step in for another round of asset purchases.

The economic environment has been set for a corporate sector shake-up, as well. One would think that with the weak yen, “Japan Inc.” would have exported its way out of these conditions, but recent data shows that Japan’s trade surplus is actually shrinking, partly because of the weaker global economy. Japanese corporations are now more likely to expand abroad, rather than just cut costs and wait for the economy to pick up.

My view: I believe this increase in the consumption tax will not have a long-term negative effect, as long as there is strong assurance that long-term interest rates will remain low. But we are still wrestling against time: It is critical for the Japanese corporate sector to make longer-term investments now in real estate, technology, or corporate expansion abroad.

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