(Bloomberg) — Japanese household spending rose for the first time in 14 months, a sign that private consumption is finally no longer a drag on growth as central bankers prepare to discuss policy next week.
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The Ministry of Internal Affairs and Communications said on Friday that real spending rose 0.5% in April from a year earlier, the first increase since February last year. The figure was in line with economists’ expectations. Spending had fallen 1.2% from the previous month.
Areas where spending increased included education, rent and clothing, while spending on cars and groceries decreased.
“Considering rising wages and the government’s tax cuts, consumer spending is likely to recover going forward,” said Hiroaki Muto, an economist at Sumitomo Life Insurance Co. “Personal spending will soon cease to be a major drag on the overall economy.”
Friday’s data may signal that the tide is starting to turn for Japan’s economy after more than two years of falling real wages and four straight quarters of falling private consumption as workers were forced to tighten their budgets. Consumer prices have been rising at or above the Bank of Japan’s 2% target all that time, with retirees living on fixed incomes being hit especially hard.
Now, a chronic labor shortage is forcing companies to raise wages to attract new hires and retain employees. Annual wage negotiations between companies and unions have resulted in large companies promising wage hikes of more than 5 percent — the steepest increase in more than 30 years. Some of those increases were reflected in wage data released earlier this week, with base wages rising at the fastest pace since 1994.
It remains to be seen whether smaller companies, which employ most of Japan’s corporate workers, will follow suit and whether higher-paid employees will increase spending. Bank of Japan officials have expressed hope that a combination of wage increases and measures such as June tax refunds will stimulate spending.
The Bank of Japan is waiting for evidence that a virtuous cycle linking wage increases with demand-led price increases is underway as it ponders the timing of its next rate hike after ending negative rates in March. Economists expect the BOJ to keep rates on hold at the end of its next policy meeting on June 14, with many expecting them to stay on hold through October and an increasing number pointing to the risk of them being left on hold in July.
Adding uncertainty to the spending outlook is the continued depreciation of the yen, which is reducing the purchasing power of Japanese people buying imported goods and considering overseas travel. A decline in spending on overseas package tours dragged down the overall index in April. Consumer confidence fell by the most in more than two years in May.
BOJ Deputy Governor Ryozo Himino said at a panel discussion earlier this week that a weaker yen will affect imports as well as have other ramifications, so it’s important for authorities to monitor the currency’s impact on the overall economy. This echoes earlier comments from Governor Kazuo Ueda, who suggested the bank was prepared to take action if currency fluctuations affect inflation.
Another downside risk going forward is a new certification fraud scandal involving Japanese automakers such as Toyota and Mazda, which has led them to halt deliveries and sales of some models. Finance Minister Shunichi Suzuki said the scandal and the resulting production halts would have a significant impact on the Japanese economy.
(Updates report details)
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