Japan Households Cut Outlays as Inflation Erodes Spending Power

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(Bloomberg) — Japan’s households cut back spending in July as persistent inflation continued to erode purchasing power, adding pressure on the government to ramp up aid when it unveils a fresh batch of economic measures in coming weeks.

Outlays dropped 2.7% in July from the previous month, the biggest fall since February 2022, as consumers pared back outlays on cars and telecommunications, ministry of internal affairs data showed Tuesday. Spending was also down 5% from a year earlier, twice the amount forecast by analysts. 

The weak data add to signs that the economy’s recovery is struggling to build momentum domestically as inflation continues to outpace wage gains and consumer spending remains below pre-pandemic levels. Key consumer prices rose 3.1% in July from a year earlier.

Prime Minister Fumio Kishida said he will expand and extend gasoline subsidies beyond their previously planned expiry to help households as he plans a new round of economic measures to be unveiled this fall. The price of gasoline recently rose to a record even with existing subsidies.

“Consumers are being selective as they try to cope with inflation,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “Wage gains increased in the spring wage negotiations, but they aren’t spreading to everyone, and people are feeling inflation more acutely as daily necessities like food get more expensive.”

While Japan’s economy expanded more than expected in the second quarter, the gains were largely driven by external demand as measured by both exports and inbound tourism. Private consumption fell an annualized 2.1% in the quarter, an indication that Japan’s longest spell of inflation in decades is weighing on household pocketbooks and threatening to upend the recovery’s momentum.

Economists expect the growth figure to be revised lower in data due Friday after recent corporate capital spending figures came in weaker than estimates. Looking to the current quarter, analysts see the economy slipping back into reverse after the flattering result of the previous three-month period.

The fragile situation will help the Bank of Japan justify keeping its ulta-easy monetary settings to support the economy until inflation becomes sustainable in tandem with wage growth. Weak spending could force the BOJ to prolong its stimulative stance even as risks of side effects grow. The latest wage data due Friday are expected to show real wages adjusted for inflation continued to fall in July. 

Another round of economic measures may help prop up support for Kishida, whose approval ratings have renewed falls in recent weeks. Existing measures are helping hold down the overall inflation rate by as much as 1.5 percentage point.

But more spending also presents problems for a government that has yet to finalize long-term funding for its ramped up defense budget and birthrate support steps.

Financing further spending through borrowing is also set to get more expensive amid upward pressure on bond yields. Should the central bank move away from its monetary stimulus it could lead to further rises in borrowing costs for a country with the developed world’s highest public debt load.

“Government spending needs to get back to pre-pandemic levels, so I don’t think Kishida will just hand out cash to everyone with his new economic measures,” Taguchi said. “Instead, I think he will focus on continuing price relief measures and targeting aid at people with low incomes.”

–With assistance from Jon Herskovitz.

(Adds economist comment, more details from release)

©2023 Bloomberg L.P.





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