As tax hikes approach, are consumers losing faith in Abenomics?

In the face of tax hikes and rising inflation expectations, Japanese households are losing faith in Abenomics, according to Capital Economics.

Consumer confidence has only partially recovered from the sharp decline suffered in October. Capital Economics attributed the drop to the government's confirmation planned consumption tax hike. The headline index increased from 41.2 to 42.5.

However, consumer confidence is lower than when Prime Minister Shinzo Abe came to power. The government has also suffered a dip in its popularity. Surveys of consumer confidence for November showed "willingness to buy durable goods" has dropped. This component has previously served as a key indicator for retail sales. As of yet there has been no rush to spend before the tax hike comes in.

Households are also increasingly fearful of the prospect of higher inflation.

Japan economist, Marcel Thieliant commented:

The share of persons who expect prices to rise over the coming year remains near a record high at 89.2%. The combination of high inflation and subdued income expectations is likely a key reason for the weakening in confidence.

Companies, by contrast, have taken a more sanguine view of Japanese economic conditions.

The Business Survey Index for all industries dropped from 12.0 in the third quarter to 8.3 in the fourth quarter. However, other components of the survey showed improvement. The employment component for large companies has reached a five year high of 7.9. Companies also forecast a 15.8 per cent year-on-year rise in investment for the second half of the fiscal year, the strongest reading in the survey's history.

Business leaders believe conditions will continue to improve and will suffer only a mild deterioration in the second quarter of next year when the tax hike hits.