Satoshi Sugiyama and Reika Kihara
TOKYO (Reuters) – Japanese household spending unexpectedly fell in May as rising prices continued to squeeze consumer purchasing power, data showed on Friday, complicating the Bank of Japan’s decision on when to raise interest rates.
Many analysts expect consumption to recover in coming months as households receive big wage increases offered by companies and tax cuts aimed at cushioning the blow from rising living costs.
However, the weak figures highlight the fragility of consumption and cast doubt on the Bank of Japan’s (BOJ) view that a strong economic recovery will keep inflation persistently near its 2% target – a prerequisite for raising interest rates.
“The Bank of Japan has always said that consumption is strong. Today’s data will force the bank to change its view, which may make it harder to justify a rate hike in July,” said Masato Koike, senior economist at Sompo Research Institute Plus.
The data showed that rising food prices weighed on spending on other items, causing consumer spending to fall 1.8% in May from a year earlier, well below the median market forecast of a 0.1% increase.
Demand for overseas package tours also fell due to the weak yen, making overseas travel more expensive, resulting in a seasonally adjusted decrease of 0.3 percent in May from the previous month.
A separate index compiled by the Bank of Japan on Friday that excludes the impact of inbound tourists also showed consumption was flat in May from the previous month, slowing from a 1.0% increase in April.
The BOJ’s index is based on data from suppliers of goods and services, which the central bank views as a more comprehensive indicator of consumption than the government’s household expenditure data, which is based on surveys filled out by a select group of households.
The weak figures come after an unexpected downward revision to Japan’s first-quarter gross domestic product (GDP) and a series of surveys showing a deterioration in consumer sentiment.
Weak private consumption is a concern for policymakers who aim to achieve sustained economic growth supported by strong wages and persistent inflation, both prerequisites for monetary policy normalization.
Bank of Japan Governor Ueda Kazuo said he expects consumption to recover as many companies implement big wage increases and government subsidies to keep electricity prices down will support household incomes.
Japanese companies have proposed an average wage increase of 5.1 percent this year, the biggest in 33 years and above the rate of inflation, which currently hovers around 2 percent, a labor union survey said on Wednesday.
Many analysts expect the Bank of Japan to hold off on raising interest rates this month until there is more evidence that wage increases are filtering through to small and medium-sized businesses and boosting consumption.
But some worry that a weak yen, which increases import costs, could lead to higher inflation and force the Bank of Japan to act.
“The Bank of Japan will likely maintain its view that weakness in consumption is temporary,” said Iwashita Mari, chief market economist at Daiwa Securities.
“If the Fed sees rising inflation as the main drag on consumption and feels it needs to forestall the risk of further price increases, it may decide to raise interest rates in July.”
The Bank of Japan will next meet on July 30 and 31, when it is due to release new quarterly growth and price forecasts that will serve as the basis for determining future monetary policy.
Japan’s economic growth in the first quarter shrank more than initially reported, triggering an unusual, unscheduled revision to GDP data, but many economists expect growth to pick up this quarter on rising wages and solid capital investment.