(Bloomberg) -- Japan’s households cut spending for a second month as inflation continues to deter consumption, backing the case for the Bank of Japan to take a cautious approach to rate hikes.
Outlays by households dropped 1.1% from a year earlier in September, compared with the consensus estimate of a 1.8% decrease, after sliding 1.9% in the previous month, according to a report by the ministry of internal affairs Friday. Outlays have now risen only twice in the past 12 months.
“Consumer spending continues to lack strength as inflation is taking toll,” said Masato Koike, senior economist at Sompo Institute Plus. “I expect a gradual recovery as wages rise, but the pickup won’t be one that’s strong enough to drive the overall economy toward a strong recovery.”
Spending on cars plunged 40.1% from a year earlier, slashing 1.47 percentage points from the overall data, as a safety certification scandal continued to drag on the sector. Outlays on housing, transportation and communications and health care also retreated, while clothes and footwear advanced along with education.
Consumer spending in Japan has consistently failed to show clear signs of strength as shoppers have been forced to cope with prices increasing at or above the BOJ’s inflation target for 30 months.
Prime Minister Shigeru Ishiba has said he will compile an economic package to help those suffering from higher costs of living as policymakers at the central bank bide their time until wage growth is robust enough to lift personal spending.
The yen’s weakness is a key factor weighing on the purchasing power of Japanese households. Consumer confidence slid for the first time in five months in October after Japan’s currency fell to the weakest level in almost three months. The currency resumed its slide after Donald Trump prevailed in the US presidential election this week.
If the yen extends its downward trajectory it could stoke discontent among consumers by spurring inflation due to higher import costs. That could also help bring the timing for the BOJ’s next rate hike forward to December, according to Kazuo Momma, a former BOJ executive director.
Japanese authorities are hopeful that a recent acceleration in wage growth will spur personal spending. Base salaries jumped by the most in 31 years in September, according to a government report Thursday.
“I don’t think today’s data itself will be changing BOJ’s view but if consumer spending fails to pick up even when real wages start to clearly rise, the bank may have to reconsider its assessment and that could have impact on their rate decision,” Koike said.
Friday’s report will be a factor in calculations for Japan’s economic growth in the third quarter in data due for release next Friday. Real spending in the three months through September fell 1% for households with two or more occupants, the report said. Economists see annualized growth in gross domestic product slowing to 0.6% quarter on quarter, according to the latest median estimate.
Consumer spending, which accounts for more than half the economy, has stayed below pre-pandemic levels.
(Updates with economist’s comments)
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