Japan household mood worsens in challenge to Abenomics: BOJ survey

[TOKYO] More Japanese felt they were worse off than three months ago as the cost of living rose and earnings fell, a central bank survey showed, casting doubt on premier Shinzo Abe's growth revival strategy as the economy sputters under the weight of a sales tax hike.

A diffusion index measuring households' confidence on the economy fell at the biggest pace in more than three years to minus 20.4 in September, the worst reading since Mr Abe's Liberal Democratic Party took power in a landmark election in December 2013, the quarterly BOJ survey showed on Thursday.

A separate index gauging households' livelihood also hit a near two-year low as more respondents felt their cost of living rose even as salaries fell, due largely to a sales tax hike in April, according to the survey. "Rising prices may have had a significant effect on sentiment," a central bank official told a briefing.

The widening gloom among households bodes ill for Mr Abe, whose"Abenomics" stimulus policies rely heavily on boosting business and public sentiment in spurring economic growth by encouraging businesses and households to spend more instead of saving.

It also complicates a crucial decision Mr Abe must make by year-end on whether to proceed with a second stage of the sales tax hike to 10 per cent next year, after having raised it to 8 per cent from 5 per cent in April.

Complaints about rising costs highlight the dilemma the Bank of Japan faces as it deploys massive stimulus to accelerate consumer inflation to 2 per cent sometime next year.

The BOJ survey, conducted for about a month to Sep 3 on 4,000 households, showed 80.4 per cent of them thought prices have risen from a year ago, the highest in nearly six years.

It also showed that 82.5 per cent expect prices to rise a year from now, up 1.9 points from three months ago. Of those respondents, nearly 80 per cent thought such price rises were unwelcome, compared with just 4 per cent who thought they were desirable.

The survey asked respondents to discount the effect of the April sales tax hike - which drove the economy into its worst slump since the global financial crisis in the second quarter - and the expected tax increase next year.

The results shed light on the pain households feel as the weak yen, driven in part by the BOJ's ultra-loose policy, pushes up prices of various imported goods like gasoline and groceries.

The yen's fall to a six-year low against the dollar has drawn complaints by some business executives and lawmakers, who feel that further yen declines would do more harm than good by pushing up import costs.

For now, the BOJ feels a weak yen is beneficial for the economy as it boosts yen-based profits big exporters earn overseas. Yen declines have also helped lift consumer inflation although it still remains just above one per cent, some distance away from the BOJ's 2 per cent target.

The BOJ survey showed households remained sceptical that Mr Abe's growth strategies would boost Japan's long-term potential.

Nearly 50 per cent of the respondents feel Japan's growth potential will fall from current levels in the future, while only 3.1 per cent see higher growth, the survey showed.

The BOJ began compiling the quarterly survey from 1993 to measure households' views on their livelihoods and prices. The diffusion index is derived by subtracting the ratio of those who felt conditions have worsened from those who felt they have improved. A negative reading means pessimists outnumber optimists.

A separate BOJ survey, also released on Thursday, showed companies' inflation expectations remained largely unchanged from three months ago.

Under its "quantitative and qualitative easing" (QQE) enacted in April last year, the BOJ pledged to accelerate consumer inflation to 2 per cent in roughly two years via aggressive asset purchases to end 15 years of mild deflation. - Reuters