Japan’s household spending slumps most since pandemic

Japan’s household spending unexpectedly fell by the most since 2020, highlighting persistent weakness in consumption, even as the Bank of Japan grows more confident that inflation has become entrenched enough to warrant further interest rate increases.

Outlays by households adjusted for inflation declined 6.8% in September from a year earlier, led by transport, education and entertainment, the Internal Affairs and Communications Ministry reported Tuesday. Economists had forecast a 3% drop. Spending fell 2.8% from the previous month on a seasonally adjusted basis.

The sharp decline poses a dilemma for the BOJ as it continues to reduce its support for the economy with interest rate hikes. Weak consumption points to the need to cool inflation to help households, but higher borrowing costs can also hurt households through mortgages and other loan expenses.

“Households are still vulnerable to concerns about rising prices,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “Since wages are rising, it’s hard to explain why consumer spending isn’t picking up.”

The central bank kept its benchmark rate at 1.25% last month, while saying underlying inflation has reached its 2% price target and there are risks that price gains may overshoot the goal. Now many market participants expect the BOJ to conduct its next hike on Dec. 18.

Real wages adjusted for inflation rose 2.2% in September from a year earlier, while nominal cash earnings increased 4.6%, the largest gain since 1997. The BOJ has repeatedly cited robust wage increases as a key factor to keep raising interest rates, because it indicates a virtuous economic cycle where companies can pass on higher costs to consumers and reward workers with higher profits.

Still, Tuesday’s household spending figures suggest that consumers aren’t entirely assuaged by the higher wages. Prime Minister Sanae Takaichi has attempted to shore up household purchasing power through subsidies and other cost-of-living measures, including a plan to cut the sales tax on food to 1% from 8% for two years starting in April.

“It’s a difficult call whether the BOJ should accelerate the pace of interest rate hikes just focusing on strong AI-related demand, while consumer spending remains weak,” said Minami.