Japan's household spending surged ahead of sales tax hike

Increase in household spending in September was the fastest on record, but outlook for wages and hiring remains weak.

    Japan's consumers have partially offset weakness in overseas demand for Japanese goods [File: Toru Hanai/Reuters]
    Japan's consumers have partially offset weakness in overseas demand for Japanese goods [File: Toru Hanai/Reuters]

    Japan's household spending rose at the fastest pace on record in September as consumers rushed to buy goods before a sales tax hike, though the test for the economy will be whether the higher levy will squeeze domestic demand in the coming months.

    And separate data showed that wages rose for the first time in nine months, but their growth remains weak.

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    Household spending jumped 9.5 percent in September from a year earlier, the fastest pace of increase since comparable data became available from 2001 and stronger than the median forecast for a 7.8 percent gain, government data showed on Friday.

    It was a tenth straight month of gains, the longest such streak since 2001.

    Spending had risen 7.2 percent in March 2014, a month before the previous sales tax increase but the higher levy subsequently led to a slowdown in consumer spending and a sharp economic slump.

    "We expect consumer spending will turn severe in October-December after pre-tax hike gains and the economy is also expected to contract," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

    Shinke believes consumer spending and the economy will recover in the first quarter next year after an expected pullback in the current quarter but said concerns about the outlook remain.

    "Consumer sentiment has stayed weak despite the government steps to mitigate the pain from the tax hike. Although deterioration in exports seems to be easing, we need to be cautious about their outlook, so there are risks to the economy."

    Japan rolled out a twice-delayed increase in the sales tax to 10 percent from eight percent on October 1, a move that is seen as critical for fixing the country's tattered finances but that could tip the economy into recession by dampening consumer sentiment.

    The government has taken steps to ease the burden on consumers by offering vouchers and tax breaks, mindful of the lessons of the 2014 tax hike. 

    Public broadcaster NHK cited unidentified sources as saying that Prime Minister Shinzo Abe will instruct his cabinet ministers on Friday to compile a package of measures to support the economy and build infrastructure to cope with huge natural disasters.

    Abe will also order the ministers to compile a supplementary budget for the current fiscal year ending in March to fund the package, NHK quoted its sources as saying.

    Labour ministry data out on Friday showed real wages, a key gauge of households’ purchasing power, rose 0.6 percent in the year to September, up for the first time since the end of last year, as nominal wage growth outpaced consumer prices.

    The tame recovery in wages is raising concerns about the outlook for private spending and the economy as solid domestic consumption has so far partially offset weak global demand.

    A poll by the Reuters news agency on Wednesday showed the rush to beat the sales tax hike likely helped the economy grow for a fourth straight quarter from July to September.

    But analysts expect the economy could shrink in the fourth quarter due to the higher tax.

    The Bank of Japan, the country's central bank, kept its key monetary policy steady last week but changed its projections slightly by saying it would maintain ultra-low interest rates, or even cut them, for as long as needed to gauge overseas risks. 

    Meanwhile, another Reuters poll showed that more than two-thirds of Japanese companies are feeling less pain from the tax hike compared with the previous increase.

    The results of the Reuters Corporate Survey support the view of the government and Bank of Japan that the economy looks likely to avoid a swoon in private consumption, thanks to their precautionary steps.

    Still, the overwhelming majority of Japanese companies remain cautious about boosting spending, with many planning to keep wages and hiring flat or even reduce them.

    Although the effect of the tax hike this time seems smaller, that may mask underlying weakness in the world's third-largest economy, analysts say.

    "Consumers could not go on a last-minute spending spree to beat the tax hike due to sluggish wage growth," said Kyohei Morita, chief economist Japan at Credit Agricole Securities.

    About three-fourths of the companies surveyed said they have no plans to increase wages or add workers.

    On hiring, 63 percent said they plan to maintain current levels, while 16 percent plan to trim their workforce; 62 percent plan to hold the line on base pay while four percent aim to reduce their wage bill.

    SOURCE: Reuters news agency