Japanese household spending falls ahead of looming sales tax hike, inflation muted

TOKYO – Japanese household spending fell 1.5 per cent in February from a year earlier, suggesting consumers are tightening belts ahead of an April 1 hike in the country’s sales tax.

The government also reported Friday that core consumer prices rose 1.3 per cent in February, though a large share of the increase was due to rising energy costs.

Prime Minister Shinzo Abe is striving to spur inflation to pull Japan out of a two-decade economic slump. The strategy hinges on getting consumers and businesses to make purchases sooner rather than later. But so far wages have not risen, and the rising cost of living seems to be triggering still more belt-tightening.

Overall, the economic data is mixed. Retail sales rose 2.8 per cent from a year earlier, but cold weather put a damper on car sales, which fell nearly 6 per cent year-on-year. Unemployment fell to 3.6 per cent from 3.7 per cent the month before, but seasonally adjusted household incomes fell 1.3 per cent.

“Household spending data for February is not that good,” said Junko Nishioka, an economist at RBS Japan Securities. But she noted that prices for durable goods such as television sets are rising as manufacturers pass higher costs for imported components on to consumers.

Spending is likely to rebound in March on a rush of last minute buying, she said.

Starting next month, Japan’s sales tax will rise from 5 per cent to 8 per cent, and economists expect that will drag on growth but not derail the stimulus-driven recovery that began last year.

Abe has pledged to seek more stimulus for the economy if the tax hike proves a harsher blow than expected. With inflation flat at about 1.3 per cent, far short of the official 2 per cent target, expectations are rising that the central bank may expand its monetary stimulus further to help cushion the blow to growth from the sales tax hike.

In theory, rising consumer demand should help push wages higher, especially given the shrinking of Japan’s labour force as its population falls and ages. But while some major manufacturers have raised wages slightly, overall employers have instead increased hiring of part-timer workers and overtime.