Consumer spending in Japan unexpectedly decreased in March at the sharpest rate in a year, and real incomes fell for the twelfth consecutive month due to high inflation, underscoring the difficulties facing the economy in constructing a robust post-COVID recovery.

Tuesday’s government figures add to the uncertainty surrounding the Bank of Japan’s policy outlook amid concerns about the banking sector and weakening global development, even as anticipation grows for the Bank of Japan to gradually withdraw its ultra-easy monetary policies.

“Rising prices, while somewhat moderated by the government’s energy subsidy programs, have put downward pressure on consumption by shaving households’ real purchasing power,” said Masato Koike, economist at Sompo Institute Plus.

The report revealed that household spending decreased 1.9% in March from a year earlier, against economists’ consensus expectations for a 0.4% increase and after a 1.6% increase in February.

It represented the greatest drop since March 2022’s 2.3%, when Japan was still attempting to control the coronavirus’s spread.

Spending declined 0.8% less than expected on a seasonally adjusted month-to-month basis, following a 2.4% decrease in February, and registering a second month of decline.

Household spending increased by 0.7% for the entire fiscal year 2022, which concluded in March. This is a slowdown from the fiscal 2021’s 1.6% growth.

Japanese real wages continued to decrease in March, falling 2.9%, marking a full year of reductions that began in April 2022 due to decades-high consumer inflation.

Despite the benefits of loosened COVID-19 regulations for local consumers and foreign visitors, rising prices have slowed Japan’s consumption-driven recovery from the pandemic.

In addition, although large companies reached three-decade-high salary increases during their labour negotiations in March, whether the trend spreads to smaller companies will be crucial to the prognosis for the normalisation of monetary policy under the incoming BOJ Governor Kazuo Ueda.

Analysts predict that decreasing price growth will result in a real wage recovery in the near future.

According to economists in the most recent Reuters poll taken last month, Japan’s economy likely grew an annualised 1.4% in January-March and is expected to do so again in April-June.

(Adapted from USNews.com)

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