Japan’s households boost spending despite inflation hit
JAPAN’S household spending rose for a fifth month, providing some support for an economy that analysts say contracted in the third quarter, but coming in below expectations.
Outlays by households adjusted for inflation gained 1.8 per cent in September from a year ago, led by transportation and entertainment, the Ministry of Internal Affairs and Communications reported on Friday. The result missed the median economist estimate of a 2.5 per cent rise, with falling spending on housing and education dragging on overall figures.
Consumption accounts for more than half of Japan’s gross domestic product.
While spending held up despite the hit from inflation, a GDP report on Nov 17 is forecast to show the economy has contracted in the three months through September, ending a five-quarter period of expansion. Exports have fallen while housing starts dropped due to regulatory changes.
Consumption is a key indicator to gauge if households are becoming resilient against the rising cost of living.
The pace of inflation has been at or above the Bank of Japan’s 2 per cent target for three and a half years, with a key price gauge picking up pace in September. Whether or not spending holds up toward a virtuous economic cycle is a vital question for both the country’s new prime minister and the central bank.
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“We are seeing better numbers for consumption on a year-on-year basis because the results were not good last year during this period,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Working households are supporting spending, reflecting the impact of wage increases and bonuses.”
Nominal wages have been on the rise, but real wages adjusted for inflation have fallen nonstop through September this year. That means household purchasing power has been shrinking, leading to voter dissatisfaction.
Prime Minister Sanae Takaichi has ordered an economic package to help households cope with inflation. It’s expected to include subsidies for gas and electricity charges during the winter and regional grants to ease price pressures.
Her ruling Liberal Democratic Party and other major parties have also agreed to cut the petrol tax by the end of this year.
Takaichi views price-relief measures as a priority after voters punished the LDP in recent national elections for falling short on price relief measures. She has effectively ruled out fresh cash handouts, which the LDP had proposed ahead of a July election as a key measure.
Takaichi is known for her support for monetary easing, a factor that has contributed to market bets that the BOJ may be hiking rates at a slower pace. She hasn’t made any direct demands on the central bank since she took office last month, but the yen continues to be weak against the dollar, recently trading near an eight-month low.
That’s fueling concerns that rather than demand, higher import costs from the cheaper currency will drive up inflation.
“Spending on services is improving, but the situation for items like food remains tough. I don’t think consumption will show up as particularly strong in the July-September quarter GDP figures,” said Norinchukin’s Minami. “I don’t believe the BOJ can say the supply-demand gap is narrowing as it should be.” BLOOMBERG
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