TOKYO Japanese retail sales rose in March at their fastest pace in 17 years as consumers went on a shopping spree before a national sales tax hike took effect on April 1, setting the stage for a decline in consumer spending the following month.
The 11.0 percent annual increase in retail sales matched the median estimate and marked the fastest gain since the last time the government raised the sales tax in 1997, as consumers stocked up on electronics, toiletries and clothes to avoid paying higher prices.
The data suggest that in the immediate aftermath of the sales tax increase consumer spending will fall, but the decline will still be within the central bank's expectations. Economists also expect sales to bounce back in May, meaning the economic recovery is unlikely to be derailed.
"I don't think there is too much to worry about, because things seem to be moving as the Bank of Japan expected," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"Summer bonus payments are likely to increase, which should support a gradual rebound in consumer spending from May."
The government raised the nationwide sales tax to 8 percent from 5 percent on April 1.
The move is intended to earn extra income for rising welfare costs, but it has also caused some volatility in economic data and concern that the world's third-largest economy will enter a prolonged contraction if consumers shun higher prices.
Tokyo stocks have faltered this year as investors worry that a stumble in the economy could deliver a blow to the government's aggressive monetary and fiscal expansionary campaign to beat years of deflation and sub-par growth.
BOJ officials have repeatedly said any negative impact from the sales tax hike will be temporary and that the economy can continue to expand above its potential growth rate despite recent signs of slowing.
The BOJ is likely to issue on April 30 forecasts underscoring its conviction that inflation will head steadily towards its 2 percent target, suggesting it has no plans to expand stimulus any time soon. Markets widely expect the central bank to maintain its stimulus programme at Wednesday's meeting.
The government is also bringing forward public works spending to give the economy an extra boost this year so it can quickly bounce back from the tax increase.
Nonetheless, some advisers close to Prime Minister Shinzo Abe think the BOJ will need to add to last April's massive stimulus to ensure consumer prices reach the central bank's 2 percent inflation target.
The last time the government raised the sales tax in April 1997, retail sales rose an annual 12.4 percent in March and fell an annual 3.8 percent in April.
Many politicians blame that tax hike for a recession that soon followed, but others argue that the Asian financial crisis was the bigger reason for Japan's economic contraction.
(Editing by Shri Navaratnam)