Firms had built inventories at a rapid clip in 2004 and the first part of this year, and by late winter many businesses seemed to have been more satisfied with their inventory positions. Consequently, they scaled back rebuilding efforts and trimmed the growth of production accordingly. Still, activity rose rapidly enough to further erode margins of economic slack.
In Japan, two rounds of consumption tax hikes are scheduled. Based on the experience of the economy going into recession when consumption tax was raised last time, in 1997, there are some concerns that the same might happen again. However, looking at the economic conditions of that time, the economic growth rate plunged immediately after the tax hike but subsequently showed signs of recovery.