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Fri, Jan 28, 2005 - Page 12 News List

Japan's December retail sales decline on tax worries

BRACING FOR HIKES Spending fell in the last quarter of 2004 as consumers bought less food and sporting goods in anticipation of a ?145,000 tax hike to take effect in April


Japanese retail sales unexpectedly fell in December for a second month, adding to concern that a tax increase will restrain consumer spending and growth in the world's second-largest economy.

Sales fell 0.5 percent, seasonally adjusted, from November, led by food and sporting goods, the Ministry of Economy, Trade and Industry said today in Tokyo. The decline compared with the median 0.4 percent increase forecast by six economists in a survey.

Consumers may further cut spending at retailers including Aeon Co because they are bracing to pay as much as 145,000 yen (US$1,404) in extra tax in the year starting April 1 under new rules. A drop in consumer spending, which makes up half the economy, might curb growth at a time when exports are flagging.

"The major issue for consumption in 2005 will be the impact of tax changes," said Glenn Maguire, chief economist for Asia at Societe Generale Australia Ltd in Sydney.

"It does have the potential to erode income growth and therefore depress consumption."

From a year earlier, retail sales fell 0.7 percent in December, today's report showed. Sales declined 0.6 percent in all of last year.

Tax breaks "retail sales are largely flat," said Naomichi Miyazawa, a trade ministry official. "Last year our assessment was they are showing signs of recovery."

Japan in April will halve income tax breaks worth as much as 290,000 yen, in place since 1999, to help trim the largest public debt in the world. The Ministry of Finance estimates debt will balloon to 151 percent of GDP by the end of next fiscal year. The lower tax rate is provided through a rebate paid every January.

"If you consider the knock-on effect, such as on employment, the tax increase could as much as halve Japan's potential 1 to 1.5 percent growth rate," Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute, said before the release.

Growth in consumer spending slowed for a second straight quarter in the three months ended Sept. 30, expanding 0.9 percent.

Consumer confidence in December fell for the first time in three months as households grew more pessimistic about employment and wages, which have risen just six times in 48 months.

Exports Retails shares declined. The Topix Retail Trade Index fell 0.5 percent to 691.750 at 2:23pm in Tokyo, led by clothing store Fast Retailing Co and Aeon. The index has gained 47 percent in the past year.

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