The impact of a hike in consumption tax on Japan's economy hasn't been as bad as feared, says the country's central bank chief, who predicts the effects to be contained and economic recovery to resume in the third quarter.
Japan raised its sales tax last month to 8 percent from 5 percent in a bid to bring down its hefty debt pile –the country has the world's largest debt-to-gross domestic product (GDP) ratio, at over two-to-one – but the decision has been panned by critics who warn that the move could derail the economy's nascent recovery.
Bank of Japan (BOJ) governor Haruhiko Kuroda notes that while consumption has fallen dramatically since the tax hike, he remains optimistic Japan's economy can shake off the ill-effects.
"Just before the consumption tax hike, consumption on expenditures on non-deliverables like automobiles etc, soared, [although] now they are declining quite sharply. But on balance, the decline after the tax hike had been as we expected or even less than we expected," Kuroda told CNBC at the weekend on the sidelines of the ADB annual meeting in Kazakhstan.
"So we don't think the negative impact of consumption tax hike would be contained and the economy would start to recover in the July-September quarter," he added.
Japan's economy grew 0.7 percent in the final quarter of 2013 to log its fifth straight quarter of positive growth. Credit has been given to "Abenomics"– the radical plans by Prime Minister Shinzo Abe to kickstart the economy – in which the BOJ played an important role in the aggressive easing of monetary policy.
The BOJ has also set a goal to increase consumer inflation rate to 2 percent by the end of fiscal 2015/2016, which Kuroda says remains on track.