Japan’s households unexpectedly cut spending for the first time in six months, in a sign of the fragility of domestic demand as the Bank of Japan (BoJ) prepares to consider raising borrowing costs later this month.
Outlays by households adjusted for inflation fell 3% in October from a year earlier, led by spending declines in transport and housing, the Ministry of Internal Affairs and Communications reported yesterday. Economists had expected a 1% gain.
Private spending is a key component in the BoJ’s goal of achieving a virtuous economic cycle in which wage gains help fuel demand-led price increases. Domestic consumption has expanded for three straight quarters, albeit at a subdued pace. Still, that hasn’t been enough to prevent a contraction in the third quarter as US tariffs dragged on economic growth. Revised data for Japan’s gross domestic product is due Monday.
“You can see how consumption remains weak,” said Masato Koike, senior economist at Sompo Institute Plus. “Given the level of inflation, it’s difficult for spending to grow from disposable income, and outlays on food and cars are declining.”
The BoJ said in its October outlook report that private consumption will likely stay more or less flat for now before gradually returning to “a moderate increasing trend, with a continued rise in employee income.” The negative number Friday will add an element of complexity as the BoJ moves toward its next rate hike, but isn’t expected to derail that trajectory.
BOJ Governor Kazuo Ueda gave a signal Monday that the board is moving toward a hike as soon as Dec. 19, by explicitly mentioning the fact that the bank will consider a rate hike. Overnight index swaps point to about a 90% probability of a December rate increase.
“Weak consumption is a headwind for rate hikes,” said Koike. “But at the same time the reason for the fragility is inflation encouraged by a weak yen, so a December rate hike is basically expected at this point.”
Consumption makes up more than half of Japan’s GDP and will be crucial to whether the economy returns to a growth path after recording the first contraction in six quarters during the summer.
Data due Monday are expected to show economic growth in the three months through September was weaker than the preliminary report, when exports slumped in the face of US tariffs and private consumption offered only anaemic support. The capital spending component is forecast to be revised lower after recent data for the period were feeble.
Looking ahead, the strength of consumption will depend largely on the interplay between prices and wages. The nation’s inflation gauge has stayed at or above the BoJ’s 2% target for 43 months, the longest stretch since 1992. Data Monday may show that real wages fell for a 10th month in October, underscoring how steady gains in nominal pay aren’t keeping up with price growth.
To ease the burden on households, Prime Minister Sanae Takaichi last month announced ¥2.9tn ($18.7bn) in price relief measures as part of an economic package, including subsidies for utility bills and reductions in some taxes. The government estimates these steps will together shave an average 0.7 percentage point off the nation’s overall inflation index between February to April.
The effectiveness of these measures will likely influence Takaichi’s popularity, as persistent inflation fuelled voter frustration that led to successive setbacks in two national elections and helped remove her predecessors from office. A poll conducted by Nikkei last weekend showed her approval rating at 75%, remaining high by historical standards.
Wage trends will also shape private spending. In the latest development, several major labour unions formally announced their targets for the annual pay negotiations culminating in March. Most are maintaining their goals after securing the largest pay gains in more than three decades earlier this year, suggesting momentum remains intact.
“Looking ahead, I expect private consumption to be on a recovery trend,” said Sompo’s Koike. “Nominal pay continues to rise at a high pace and given inflation is expected to be more subdued spending is likely to recover with an improvement in real wages.”