Japan’s Consumer Spending Stalls in July, Complicating Central Bank’s Interest Rate Strategy

Japanese household spending grew by only 0.1% in July, well below the expected 1.2% rise, government data showed. The slower-than-anticipated growth could hinder the Bank of Japan's plans to raise interest rates, as weak consumer spending persists amid rising inflation and stagnant wage gains.

Japan's Consumer Spending Stalls in July as Wage Growth Uncertainty Looms, Undermining Recovery

In July, Japanese household spending increased less than anticipated due to consumers' reluctance to relax their purse strings in response to escalating prices. This could complicate the central bank's intentions to raise interest rates in the months ahead.

According to government data released on September 6 (via Reuters), consumer expenditure increased by 0.1% yearly in July instead of the median market forecast of 1.2% growth. Spending decreased by 1.7% on a month-to-month basis, seasonally adjusted, as opposed to an anticipated 0.2% decrease.

"There is a very good chance that consumer spending will be negative again in the next month," said Takeshi Minami, chief economist at Norinchukin Research Institute, adding that households appear skeptical about whether wage gains will continue next year.

According to data released a day earlier, Japan's inflation-adjusted wages increased for the second consecutive month in July, predominantly due to increased summertime bonuses. This spring, the most rapid growth rate in nearly 32 years was observed in base pay, or regular pay, due to the labor-management wage negotiations.

However, the government stated that the primary measure would be whether real wages continue to increase in August and beyond without the seasonal factor of summer bonuses.

An Internal Affairs Ministry official stated that consumers reduced their expenditures on food and utility expenses in July due to increased prices, while they increased their expenditures on television and travel. Additionally, they allocated their income to savings.

Japan's Economy Shows Signs of Recovery, but Weak Consumption Challenges Further BOJ Rate Hikes

Over the past year, Japan's economy has been characterized by a weakness in private consumption, which comprises over half of the economic output. However, the first increase in five quarters in April-June fueled optimism for a consumer-driven recovery.

The Bank of Japan cites robust consumption, enduring inflation, and solid wages as critical factors in its decision to increase interest rates.

The Bank of Japan (BOJ) eliminated negative interest rates in March and increased short-term rates to 0.25% in July, believing that the economy was making strides toward consistently attaining its 2% inflation target.

Minami stated that the BOJ must verify consumption recovery through pertinent data before increasing borrowing costs again. He also noted that the July rate increase was implemented without consideration of this.

For the first time in over a year, the Japanese government upgraded its economic assessment last month in response to indications of an increase in personal expenditure.