Japan’s household spending falls, clouding growth outlook

TOKYO – Japan’s household spending unexpectedly fell in May, raising the likelihood that consumption will not be a key driver for the economy in the second quarter and complicating the prospects for the central bank’s next interest rate hike.

Real outlays, adjusted for inflation, declined 1.8 per cent from a year ago, the Ministry of Internal Affairs reported on July 5. The result missed the consensus forecast of a 0.3 per cent increase. Spending slipped 0.3 per cent from April.

Components that drove the decline included outlays for food, which fell 3.1 per cent year on year, utilities and household durable goods. Spending on education and cars increased.

“Consumption continues to be weak as real wages remain negative and consumers expect inflation to stay on,” said Ms Harumi Taguchi, principal economist at S&P Global Market Intelligence.

“Some companies are finding it hard to pass on rising costs to consumers given the current state of consumption.”

The result may cast doubt on the Bank of Japan’s (BOJ) view that private consumption is on the mend after falling for four consecutive quarters. The boost expected to arise from strong wage gains this fiscal year has yet to materialise in the form of increased spending.

A final tally of annual pay negotiations showed labour unions won a 5.1 per cent raise in 2024, the highest in more than three decades. Only a small portion of workers in Japan belongs to unions and a broader pay gauge that includes non-unionised workers has shown much weaker gains, with wages lagging inflation for more than two years.

Consumer inflation has stayed at or above the BOJ’s 2 per cent target for more than two years, weighing on consumer sentiment. While the mood among households has recovered from pandemic lows, it remains below the 20-year average.

The yen’s slide is expected to spur further gains in prices for imported raw materials, energy and food, creating fresh headaches for consumers and many businesses.

Among measures to ease the cost-of-living crunch, the government has given a large number of households a one-off tax rebate in June, while promising to restart utility subsidies in August.

Ms Taguchi noted that the measures may have only limited impact, saying: “The tax rebate and additional utility subsidies can only provide a floor to consumption rather than a shot in the arm.”

One in three economists surveyed by Bloomberg expects the central bank to raise interest rates at the end of July, while also detailing its plans for reducing purchases of government bonds.

“I don’t think this gives the BOJ a greenlight for another rate hike,” Ms Taguchi said. BLOOMBERG