Japan’s spending decline hits economy

The consumer spending in Japan has declined unexpectedly in March at the fastest rate in a year, along with a twelfth consecutive month of decline in real wages due to persistent inflation. The decline has highlighted the challenges the economy faces in mounting a strong post-COVID revival. Tuesday’s government data reinforces the uncertainties around the Bank of Japan’s policy outlook amid slowing global growth and financial sector worries.

The data also showed household spending falling 1.9% in March from a year earlier, marking the biggest decline since March 2022 when Japan was still trying to curb the spread of coronavirus. On a seasonally adjusted, month-on-month basis, spending decreased 0.8%, against an estimated 1.5% increase, posting a second month of decline after being down 2.4% in February. The full fiscal year 2022 that ended in March saw household spending rise 0.7%, slowing from 1.6% expansion in fiscal 2021.

Separate data showed Japanese real wages falling 2.9% in March, marking the full year of declines that started in April 2022, thanks to decades-high consumer inflation. Despite eased COVID-19 restrictions on domestic shoppers and international travellers, accelerating prices have put a lid on Japan’s consumption-led recovery from the pandemic.

Although the large firms concluded three-decade-high wage hikes at their March labour talks, whether the trend spreads to smaller businesses is key to the outlook for monetary policy normalisation under the new BOJ Governor Kazuo Ueda. Looking ahead, analysts say slowing price inflation will lead to a rebound in pay in real terms. Economists in the latest Reuters poll showed last month that Japan’s economy likely expanded an annualised 1.4% in January-March and is set to continue growing at the same pace in April-June.