Japanese Household Spending Drops Unexpectedly, BOJ Rate Fuzzy By Reuters

By Satoshi Sugiyama and Leika Kihara

TOKYO (Reuters) – Japanese household spending fell unexpectedly in May as higher prices continued to squeeze consumer purchasing power, data showed on Friday, complicating the central bank’s decision on how quickly to raise interest rates.

Many analysts expect consumption to rebound in the coming months after big wage increases offered by companies and a tax break aimed at softening the blow from rising living costs hit families.

But the soft reading underscores the fragile nature of consumption and casts doubt on the Bank of Japan’s (BOJ) view that a strong economic recovery will long-term keep inflation around its 2% target – a prerequisite for raising interest rates.

“The BOJ has said all along that consumption is strong. Today’s data could force the bank to change that view and make it difficult to justify a rate hike in July,” said Masato Koike, senior economist at the Sompo Institute. Plus.

Consumer spending fell 1.8% in May from a year earlier, well below the average market forecast for a 0.1% rise, as rising food prices weighed on spending on other items, the data showed.

Demand for overseas travel packages also fell due to weak demand, which makes it expensive to travel abroad. Spending fell 0.3% in May on a seasonally adjusted, month-over-month basis.

A separate index compiled by the BOJ on Friday, which strips out the impact of inbound tourism, also showed consumption was unchanged in May from last month, slowing from a 1.0% gain in April.

The BOJ index is based on data from suppliers of goods and services. It is closely watched by the central bank as a more comprehensive gauge of consumption than government data on household spending, which is based on surveys completed by a select group of households.

The soft reading comes in the wake of a surprise downward revision to Japan’s first-quarter gross domestic product (GDP) and a series of surveys showing worsening consumer sentiment.

Sluggish private consumption is a source of concern for policymakers trying to achieve sustained economic growth supported by solid wages and stable inflation, which are prerequisites for normalizing monetary policy.

BOJ Governor Kazuo Ueda has said he expects consumption to rebound with large wage increases offered by many firms, and government subsidies to curb electricity bills to support household incomes.

Japanese firms offered wage increases of 5.1% on average this year, the biggest increase in 33 years and outpacing inflation that now hovers around 2%, a survey of labor unions showed on Wednesday.

Many analysts expect the BOJ to hold off on raising rates this month to wait for more evidence that rising wages will spread to smaller firms and boost consumption.

But some suspect that rising inflation, fueled in part by a weak yen pushing up import costs, could prompt the BOJ to act.

“The BOJ will probably stick to its view that the weakness in consumption will be temporary,” said Mari Iwashita, chief market economist at Daiwa Securities.

“It may even decide to raise rates in July if it sees rising inflation as the main factor hurting consumption and feels the need to prevent the risk of further price rises.”

The BOJ next meets for a policy meeting on July 30-31, when it will also produce new quarterly growth and price forecasts that serve as the basis for setting future monetary policy.

Japan’s economy shrank more than initially reported in the January-March quarter in a rare and unplanned revision of GDP data. But many economists expect growth to rebound this quarter thanks to higher wages and robust capital spending.