By Satoshi Sugiyama and Leika Kihara
TOKYO (Reuters) – Japanese household spending unexpectedly fell in May as higher prices continued to squeeze consumers’ purchasing power, data showed on Friday, complicating the central bank’s decision on how soon to raise interest rates.
Many analysts expect consumption to pick up in coming months as big pay rises offered by companies and a tax cut aimed at cushioning the blow of rising living costs trickle down to households.
But the weak reading underscores the fragile nature of consumption and casts doubt on the Bank of Japan’s (BOJ) view that a robust economic recovery will keep inflation durably around its 2% target, a prerequisite for raising interest rates.
“The Bank of Japan has been saying all along that consumption is firm. Today’s data could force the bank to change that view and make it harder to justify a rate hike in July,” said Masato Koike, senior economist at Sompo Institute Plus.
Consumer spending fell 1.8% in May from a year earlier, well below the median market forecast for a 0.1% increase, as rising food prices weighed on spending on other items, the data showed.
Demand for outbound package tours also fell due to the weak yen, which makes overseas travel more expensive. Spending fell 0.3% in May on a seasonally adjusted month-on-month basis.
The soft reading follows an unexpected downward revision to Japan’s first-quarter gross domestic product (GDP) and a series of surveys showing worsening consumer sentiment.
Sluggish private consumption is a cause for concern for policymakers who are striving to achieve sustained economic growth supported by solid wages and durable inflation, which are prerequisites for normalizing monetary policy.
BOJ Governor Kazuo Ueda has said he expects consumption to recover as large wage increases offered by many companies and government subsidies to reduce electricity bills shore up household incomes.
Japanese companies have offered to raise wages by an average of 5.1 percent this year, the biggest increase in 33 years and outpacing inflation now running at around 2 percent, a union survey showed on Wednesday.
Many analysts expect the BOJ to hold off on raising rates this month as it awaits more evidence that wage increases will spread to smaller firms and boost consumption.
But some suspect rising inflation, driven in part by a weak yen that increases import costs, may prompt the BOJ to act.
“The BOJ will likely maintain its view that weakness in consumption will be temporary,” said Mari Iwashita, chief market economist at Daiwa Securities.
“It could even decide to raise rates in July if it sees rising inflation as the key factor affecting consumption and feels the need to prevent the risk of further price increases.”
The BOJ will meet again for a monetary policy meeting on July 30-31, when it will also produce new quarterly growth and price forecasts that will serve as a basis for deciding future monetary policy.
Japan’s economy contracted more than initially reported in the January-March quarter, in a rare and unscheduled revision to GDP data. But many economists expect growth to pick up this quarter thanks to higher wages and solid capital spending.