Japan’s household spending shrank the most in almost three years, casting a cloud over the economy’s growth prospects as the central bank mulls the timing for a widely expected interest rate hike.
Household outlays declined by 6.3 per cent in January from a year earlier, the biggest drop since February 2021, Japan’s Ministry of Internal Affairs and Communications reported on March 8. It was the 11th straight decline and steeper than economists’ estimate of a 4.1 per cent retreat. Spending fell 2.1 per cent from December 2023.
Personal spending has stayed weak in Japan as salary gains continue to lag behind inflation. Although cash earnings figures for January were better than expected, the 0.6 per cent fall in real earnings marked the 22nd straight month of declines.
There could be further pressure on real wages in February, as a leading indicator for national price trends pointed to a jump in consumer inflation.
Personal spending was among factors contributing to the surprise economic contraction in the fourth quarter. March 8’s data indicated that spending may continue to exert a drag on growth in 2024.
While March 8’s figures will send a cautionary signal to the Bank of Japan (BOJ) as the authorities mull an end to the negative interest rate policy, they probably will not derail the central bank from hiking for the first time since 2007 in March or April, as predicted by most economists.
A narrowing of Japan-United States interest rate differentials could support the yen, reducing the inflationary pressure from imports and giving households more spending power.
The BOJ was optimistic about the outlook for private spending in its quarterly outlook report released in January, saying that although consumption may be hurt by price rises, “it is projected to keep increasing moderately, partly supported by household savings that had accumulated as a result of pandemic-related restrictions, with nominal employee income continuing to improve”.
Annual wage negotiations are reaching a peak and early results are looking promising. Some regular workers under UA Zensen, a labour organisation covering sectors including retail and food services industries, have achieved a record 6.7 per cent wage increase, the union said on March 7.
Prime Minister Fumio Kishida is monitoring trends in consumption and wages as a key to judging whether the country has finally overcome deflation. BLOOMBERG
