Japan to Speed Up Spending as Consumers Flash Warning: Economy

Photographer: Kiyoshi Ota/Bloomberg

Customers shop for dried sweet potatoes at a market in the Ueno district of Tokyo, Japan. Close

Customers shop for dried sweet potatoes at a market in the Ueno district of Tokyo, Japan.

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Photographer: Kiyoshi Ota/Bloomberg

Customers shop for dried sweet potatoes at a market in the Ueno district of Tokyo, Japan.

Japan will speed up deployment of government cash in coming months as a surprise drop in consumer spending in February triggered concern the nation’s long-awaited inflation is now damaging purchasing power.

Finance Minister Taro Aso told reporters that data showing a slump in household expenditure two months before the first sales-tax increase since 1997 was a problem, and Prime Minister Shinzo Abe’s administration will pour 40 percent of outlays for the next fiscal year into the April-June quarter. He’d already pledged to fast-track stimulus spending.

Data today also showed inflationary pressures are spreading even before the 3 percentage-point sales-tax increase take effect on April 1, as the price of durable goods soared the most since the early 1980s. With officials striving to prevent a repeat of the recession that followed the rise in the levy 17 years ago, the central bank also may face calls for action.

“We can’t be optimistic about the resilience of the economy after the sales-tax hike,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “It’s possible the government will have to compile another fiscal stimulus package this year. We expect the Bank of Japan will add easing in June or July.”

Household spending fell 2.5 percent in February from a year earlier, the first drop in six months, compared to the median estimate of economists for a 0.1 percent rise. Retail sales slowed, while a measure of inflation that strips out energy and fresh food increased the most since 1998.

Japan's Economic Shock Therapy

The yen has gained about 3 percent against the dollar this year after an 18 percent slide in 2013. The Japanese currency was little changed at 102.14 as of 1:33 p.m. in Tokyo.

Warning Sign

While the data, which include a measure of demand for workers approaching a two-decade high, offer policy makers confidence their drive to end deflation is working, they also flash a warning sign. Without wage gains, the danger is that the end of 15 years of sustained price declines will damage the world’s third-largest economy.

“Households are suffering from inflation as their incomes haven’t grown much,” Iizuka said. “People are purchasing durable goods to save money before the sales-tax hike, so they have to cut back on non-durables.”

The splurge on hard goods comes despite their prices rising in February at the fastest pace since April 1980. Abe said yesterday that the economy has reached a stage that cannot be called deflation.

Household spending on clothing and footwear fell 9.2 percent from a year earlier. Outlays on furniture and household goods soared 25.4 percent.

Labor Market

The unemployment rate fell to 3.6 percent, matching the lowest level since December 1997, and the number of jobs per applicant reached the highest level in seven years.

“Labor markets continued to tighten in February,” said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong. “Slowly but surely, the recent labor market tightness is translating into wage growth,” she said in reference to large companies raising pay in the annual spring labor negotiations.

Finance Minister Taro Aso said today that the government will front-load spending in the budget for the fiscal year starting April 1. In addition to the June expenditure target, the government will aim to complete 60 percent of projects by the end of September.

Contraction Looming

Japan is set for a one-quarter contraction in the next three months as spending slows after the tax rise takes effect. Abe has to steer the nation through the aftermath, with an adviser to the premier saying the central bank may decide by May whether to add to unprecedented stimulus.

Core inflation will probably settle around 1.2 percent or 1.3 percent over the next six months, said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc in Tokyo.

The consumer price index stripped of perishables and energy rose 0.8 percent, the most since 1998. The BOJ’s key inflation gauge, which excludes just fresh food, rose 1.3 percent. Overall inflation accelerated to 1.5 percent.

Land prices in Japan’s three largest metropolitan areas -- Tokyo, Osaka and Nagoya -- rose for the first time in six years, increasing 0.7 percent as of Jan. 1 from 12 months earlier.

Starbucks Coffee Japan Ltd. will increase the price of a tall-sized drip coffee to 350 yen ($3.42) from 340 yen on April 1, the day of the consumption-tax increase. While McDonald’s Corp.’s Japan business will raise prices of most menu items to reflect the higher levy, the restaurant chain will cut the price of a hamburger to 100 yen from 120 yen.

The sales-tax increase to 8 percent from 5 percent will boost the headline inflation figure by at least 2 percent points because about 70 percent of goods in the consumer price index are taxable, RBS’s Nishioka said.

BOJ Stimulus

The BOJ could decide as soon as mid-May whether further stimulus is needed to keep inflation on track for its 2 percent target after the levy is raised, Etsuro Honda, an adviser to Abe, said in an interview this week.

Thirty-eight percent of economists forecast the BOJ will add to monetary easing by the end of June and 73 percent see it by the end of September, according to a Bloomberg News survey this month.

The BOJ will release Japanese companies’ price forecasts for the first time on April 2 as part of its full Tankan survey of business sentiment.

To contact the reporters on this story: Chris Shimamoto in Tokyo at cshimamoto@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net Andy Sharp, Arran Scott

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