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, the ministry of internal affairs reported on Friday (Mar 8).

It was the 11th straight decline, and it was steeper than economists’ estimate of a 4.1 per cent retreat. Spending fell 2.1 per cent from the previous month.

Among categories seeing declines in outlays were housing, culture and recreation, transportation and communication, with spending on cars slumping by 30 per cent. Spending on education, clothing and footwear rose.

Daihatsu Motor, a wholly-owned subsidiary of Toyota Motor, had to suspend domestic production and deliveries of multiple models from December over a vehicle certification scandal. Some of that output remains offline.

“Daihatsu’s production halt caused car purchases to drop and overall consumption is a bit weak,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “It will take a while before we can see if consumption will improve with slowing inflation lifting consumers’ sentiment.”

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Taguchi said it would make sense for the Bank of Japan (BOJ) to signal an end to the negative rate in March “and actually make the move in April after more data becomes available”.

Financial markets didn’t react much to the data, with the yen and bond yields largely unmoved.

Volatile overnight swaps that signal the outlook for rate moves are still pricing in about a 71 per cent chance of a hike in March, little changed from late yesterday.

Market bets on a March rate increase surged on Thursday as strong wage data and promising developments from annual wage talks accompanied comments from some government officials telegraphing support for an early move.

Personal spending has stayed weak in Japan as salary gains continue to lag 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. Friday’s data indicate spending may continue to exert a drag on growth this year.

While Friday’s figures will send a cautionary signal to the BOJ, they probably won’t derail the bank from hiking for the first time since 2007 this month or next, as predicted by most economists.

A narrowing of Japan-US 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.

The central bank said 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 Thursday.

Prime Minister Fumio Kishida is monitoring trends in consumption and wages as a key to judging whether the country has finally overcome deflation. BLOOMBERG