JAPAN’S households continued to cut back on spending as sticky inflation discouraged discretionary outlays.

Outlays decreased 0.5 per cent in February from a year ago, sliding for a 12th consecutive month, the Ministry of Internal Affairs reported on Friday (Apr 5). The decline narrowed from the 6.3 per cent drop in the previous month and compared with economists’ forecast of a 2.9 per cent retreat. Spending rose 1.4 per cent from a month earlier.

Friday’s results show the impact of persistent price increases on spending patterns. The key nationwide gauge for consumer inflation has hovered at or above the Bank of Japan’s (BOJ) 2 per cent target for almost two years. Even with workers having achieved large pay gains last fiscal year, real wages have fallen for 22 consecutive months, with data due Monday expected to show the downward trend extending for another month.

That trajectory may change later this year. Annual wage talks this year are on track to result in wage gains exceeding 5 per cent, the highest in more than three decades. At that pace, pay increases that would comfortably outstrip inflation, which is forecast by economists to slow to 2.3 per cent in 2024.

The robust pledges on wages were a key factor in the BOJ’s decision last month to end its negative rate regime with its first hike since 2007. Even before the strong wage negotiation results began to emerge last month, the central bank was somewhat optimistic about the prospects for rising wages feeding into demand.

In its January outlook survey, the BOJ board said tight labour conditions would help fuel pay increases. “Against this backdrop, although private consumption is expected to be affected by the price rises, it is projected to keep increasing moderately for the time being,” the report said. It will update its projections later this month.

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In Friday’s report, spending on utilities declined 19 per cent, exerting the biggest drag on outlays. Among areas where spending increases were education, which rose 42 per cent, and food, which edged up 2 per cent.

In a positive signal, Japan’s economy saw demand rise to a level slightly exceeding supply in the final quarter of 2023 for the first time in almost four years. Also, the consumer confidence index has risen for the last five months.

Risk factors for the personal consumption outlook include the yen, which weakened to a 34-year low against the US dollar last week, a development that will keep upward pressure on prices for imports of food and raw materials. The prices of more than 2,800 food and drink items were scheduled to be increased this month, the most in a single month since October, according to Teikoku Databank.

Another threat is the government’s plan to end utility subsidies at the end of May, a move that will likely hit households hard this summer. BLOOMBERG