Economy

Japan’s Consumer Spending Shows Minimal Growth, Complicating BOJ’s Rate Hike Plans

TOKYO (Reuters) – Japanese household spending increased at a slower rate than anticipated in July, as consumers continued to be cautious about spending amid rising prices. This trend could complicate the central bank’s plans for further interest rate hikes in the coming months.

Government data revealed that consumer spending rose only 0.1% in July compared to the same month last year, falling short of the median market forecast of 1.2% growth. On a seasonally adjusted basis, spending actually decreased by 1.7% month-on-month, compared to an expected decline of 0.2%.

“There is a significant possibility that consumer spending will decline again next month,” stated Takeshi Minami, chief economist at Norinchukin Research Institute, noting that households seem uncertain about the sustainability of wage increases in the year ahead.

Recent data showed that inflation-adjusted wages in Japan experienced growth for the second consecutive month in July, largely due to an increase in summer bonuses. Base pay recorded its most substantial rise in nearly 32 years, reflecting outcomes from this spring’s labor negotiations.

However, the government indicated that the crucial challenge will be whether real wages continue to rise in August and after, without the seasonal influence of summer bonuses taken into account.

Although consumers spent more on items such as televisions and travel, they reduced expenditures on food and utilities due to elevated prices. An official from the internal affairs ministry further noted that consumers also opted to save some of their income.

Private consumption, which constitutes more than half of Japan’s economic output, has been a weak point in the economy over the past year. Nevertheless, it marked its first gain in five quarters during the April-June period, raising hopes for a recovery driven by consumer expenditure.

In conjunction with steady wage growth and persistent inflation, strong consumer spending is considered crucial by the Bank of Japan as it deliberates on further interest rate increases.

The Bank of Japan eliminated negative interest rates in March and raised short-term rates to 0.25% in July, on the basis that the economy was making strides toward consistently achieving its 2% inflation target.

Minami emphasized that the BOJ needs to gather relevant data before implementing another increase in borrowing costs, remarking that the July rate hike occurred without fully acknowledging the recovery in consumption.

Last month, the Japanese government upgraded its economic outlook for the first time in over a year due to encouraging signs of improved personal spending.

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