Japanese retail sales plunge after tax hike

May 29, 2014, 8:18 AM UTC

FORTUNE — Retail sales in Japan fell at their sharpest pace in three years in April, as a big rise in the country’s sales tax bit into consumers’ pockets.

The fall was slightly steeper than expected, but the reaction of financial markets suggested that the economy may have successfully negotiated one of the biggest risks to Prime Minister Shenzo Abe’s radical plans for getting it back on its feet.

Figures released Thursday by the Ministry for Economy, Industry and Trade showed that sales slumped by 13.7% from March, the biggest monthly drop since the Fukushima earthquake and nuclear disaster in 2011. But that was chiefly the result of consumers moving up purchases to March, in order to avoid the rise in sales tax that came into effect April 1. Sales had risen by a similarly-distorted 6.4% in March.

In year-on-year terms, which strip out such volatility, sales were down 4.4% on the year, slightly more than the 3.3% drop forecast by economists.

Despite the bigger-than-expected decline, Japanese stocks registered their sixth daily gain in a row, the benchmark Nikkei index ending up 0.1% at 14,681.72. The yen was little changed against the dollar at 101.54 in early European trading.

The government has raised sales tax to 8% from 5% in an effort to plug yawning gaps in its budget deficit and tackle the lingering threat of deflation. Markets had been worried that the move could stunt Japan’s economic recovery, but officials have been confident that last year’s massive monetary stimulus from the Bank of Japan had given the economy enough momentum to deal with it. The government intends to raise the tax again in October to 10%.

Although demand for consumer products held up, sales of durable goods fared worse. Car sales in particular were down by 10% on the year.

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