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Will the Consumption Tax hike in Japan throw the country off its growth path?

Japan’s Goods and Services Tax – otherwise known as Consumption Tax – was raised from 5% in 1997 to 8% in April 2014. It is set to further increase to 10% in October 2015. This decision was taken to help support higher fiscal expenditures linked to Japan’s ageing population, while also helping to trim the government’s debt.

The effect of the revised tax rate cannot be ignored. Retail sales in April 2014 declined by 4.4%, exceeding the consensus forecast of 3.3% – the biggest decline since the Tohoku earthquake of 2011.

Nonetheless, there are a few positives. Corporate orders for machinery have been on the rise since March 2014. The Gross Domestic Product (GDP) also rose higher than expected at 5.9% annually in Q1 2014 – the fastest pace recorded in over three years.

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