Japan’s Retail Sales Drop in Challenge to Abe Reflation

Japan’s retail sales fell more than forecast in June, capping a weak quarter that challenges Prime Minister Shinzo Abe’s bid to reflate the economy while heaping a heavier tax burden on consumers.

Sales dropped 0.6 percent from a year earlier, the trade ministry said in Tokyo today, steeper than a median forecast for a 0.5 percent decline in a Bloomberg News survey. In the second quarter, sales slumped 7 percent from the previous three months.

Prime Minister Shinzo Abe is counting on consumers to bear a higher sales levy even as the Bank of Japan drives the cost of living upward with record monetary easing. The risk is that spending fails to regain vigor, sapping strength from an economy lacking support from exports.

“The government and the BOJ say the economy is recovering from the slowdown after the sales-tax increase, but it’s too early to tell,” said Koya Miyamae, senior economist at SMBC Nikko Securities Inc. in Tokyo. “There’s a chance consumption will remain below year-earlier levels in the July-September quarter.”

Abe’s effort to stoke a sustained recovery in domestic demand is running up against a failure of companies to pass along record cash holdings in the form of higher wages that could help households cope with rising prices and the heavier tax burden.

Minimum Wage

Base pay was unchanged in May from a year earlier, even as overall consumer prices climbed 3.6 percent in June, boosted by the 3 percentage point increase in the sales levy and higher food and energy costs.

An advisory panel to the Health Ministry will recommend the nation’s 764 yen per hour minimum wage be lifted by at least 10 yen, the Nikkei newspaper reported today, without citing anyone, a gain of 1.3 percent.

BOJ board member Koji Ishida said he is paying close attention to consumer spending and exports. The drop in real incomes could affect private consumption, he said in a speech in Yamaguchi, western Japan.

Household spending tumbled 3 percent in June from a year, a third straight decline, according to the statistics bureau.

Economic weakness in the third quarter would increase pressure on the government to deliver another round of stimulus to shore up growth, Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong, wrote in an e-mailed note.

Job Market

Today’s data showed some signs of strength. While Japan’s unemployment unexpectedly rose to 3.7 percent from 3.5 percent, the jump was driven by more people looking for work, with the labor force increasing by 120,000 people. The labor market also tightened further, with 1.1 jobs on offer for every seeker -- the highest since 1992.

“The current level of vacancies still points to further declines in the jobless rate in coming months,” economists at Capital Economics wrote in an e-mailed note.

A survey by the finance ministry showed that more than 70 percent of companies see sales recovering by the end of July, Finance Minister Taro Aso said today in Tokyo.

Abe will need to decide in coming months whether he thinks the economy can bear another increase in the sales levy, as the government struggles to contain the world’s biggest debt burden.

The government will decide by year-end whether to go ahead with plans to lift the levy to 10 percent in October next year following the bump in April to 8 percent, Aso said.

(An earlier version of this story was corrected to show that Japan is Asia’s second-biggest economy.)

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