Japan's worst car sales in 16 months usher in tax hangover

Toyota sold its fewest number of vehicles during a month in Japan since 2011.

Photo credit: Reuters
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TOKYO (Bloomberg) -- Call it Japan’s Great Hangover.

Vehicle sales last month in Asia’s second-largest auto market fell to the lowest since December 2012 after Japan raised its consumption tax for the first time 17 years, according to industry figures released today. In the run-up to the levy being increased 3 percentage points to 8 percent on April 1, sales had surged for seven straight months.

More broadly, the figures may foreshadow the extent of the consumer backlash resulting from the higher taxes Prime Minister Shinzo Abe imposed to counter the world’s biggest debt burden. Economists estimate that this quarter, Japan will see its biggest economic contraction since the earthquake and tsunami that ravaged the country three years ago.

“Any sane person was buying big-ticket items in February or March rather than in April,” Martin Schulz, an economist at Fujitsu Research Institute in Tokyo, said by telephone. “The Japanese carmakers will have to prove how much they really can work this very difficult market.”

Total sales fell 5.5 percent to 345,226, according to the Japan Automobile Dealers Association and Japan Mini Vehicle Association. The slump may deepen this month as poor weather prevented some customers, who placed orders before the sales tax increase, from getting their cars delivered until April.

'Grave' May

The delay made industry sales for April artificially high, and the numbers could turn “very grave” starting this month, Yoshitaka Hayashi, a director at the dealer association, told reporters today.

Carmakers are bracing for a yearlong slump, with the Japan Automobile Manufacturers Association’s forecasting a record 16 percent sales decline for the fiscal year ending in March 2015.

Toyota Motor Corp. and Mazda Motor Corp. delivered their fewest number of vehicles since 2011, according to the industry figures. Fuji Heavy Industries Ltd., maker of Subaru cars, saw sales tumble 41 percent to a record low, based on data stretching back to 1993.

Nissan Motor Co., Honda Motor Co., Suzuki Motor Corp. and Mitsubishi Motors Corp. bucked the slump by posting gains. Sales rose 7.1 percent for Nissan, 12 percent for Honda, 11 percent for Suzuki and 27 percent for Mitsubishi.

Prior to the April 1 tax increase, consumers went on a binge as they helped push deliveries to more than 783,000 vehicles in March, the highest monthly tally in eight years.

A prolonged slump would undercut the benefits that automakers such as Toyota -- headed for a record profit this fiscal year -- have reaped from exports due to a weaker yen.

“There may be a temporary hangover,” said Kevin Tynan, an auto analyst at Bloomberg Industries. “Japanese automakers production and earnings are at risk.”

A slew of retail data will be released in the coming weeks, including department store sales, to shed more light on Japan’s downturn in consumption.

Slowing output

Manufacturers are reining in output and cutting orders after the sales-tax increase, the Markit Economics and Japan Materials Management Association said Wednesday. Their purchasing managers’ index for manufacturing in Japan fell to 49.4 in April, the lowest in 14 months. A reading of less than 50 signals contraction.

In the corner of a Toyota dealership Wednesday in Osaka, a space usually reserved for celebrating customers’ purchases and seeing them off was occupied by a Prius waiting to be fixed.

“It’s been several months since we have been so free,” said Isao Nakamura, a sales manager at the dealership, who estimates orders fell about 20 percent in April.

The last time Japan increased its consumption tax -- to 5 percent from 3 percent -- in April 1997, domestic car sales dropped 15 percent and declined for 21 months in a row.

For Toyota, the nation’s largest company, the decline in domestic demand adds to the challenges it faces as the carmaker looks to fend off General Motors Co. and Volkswagen AG for global sales leadership.

Toyota earnings

Including deliveries for its Hino Motors Ltd. and Daihatsu Motor Co. units, Toyota’s sales rose about 6 percent to 2.58 million in the January-to-March period. Deliveries in Japan surged 13 percent to 322,252 during the same span.

Toyota has projected a record 1.9 trillion yen profit for the fiscal year ending in March. Analysts have scaled back their estimates for Toyota’s earnings to below the company’s forecast after the automaker called back more than 6 million vehicles last month and agreed in March to pay a record $1.2 billion U.S. fine for misleading consumers about safety defects.

The average of 25 analyst estimates compiled by Bloomberg calls for net income of 1.87 trillion yen in the year ended March, which would still be a record. The company reports results on May 8.

Honda last week forecast its full-year profit may increase to 595 billion yen in the 12 months ending in March 2015, 14 percent below the average analyst estimate compiled by Bloomberg. Nissan releases its earnings results on May 12.

Japan cut its vehicle-purchase tax to 3 percent from 5 percent to cushion the effect of the sales tax increase, and plans to abolish the levy when the nation’s sales tax is raised to 10 percent in 2015.

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