Japan’s Household Spending Falls, Weighing on BOJ Rate Hike Path

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(Bloomberg) — Japan’s households cut consumption for a fourth month as inflation continues to weigh on their purchasing power, showing an economic fragility that’s likely to keep the Bank of Japan cautious about additional rate hikes. 

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Outlays adjusted for inflation fell 0.4% in November from a year earlier, led by household durable goods and clothing, the Ministry of Internal Affairs reported Friday. The result was better than expectations for a 0.9% drop, but the gauge has risen only twice in the past 12 months. Nominal spending rose 3% compared to the previous year.

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Consumer spending has been on a downtrend for months as shoppers cope with inflation that’s been at or above the BOJ’s price target for more than 30 months. The biggest wage growth in years has yet to change the tide as inflation continues to outpace a boost in paychecks. 

In November, Japanese workers’ base salaries grew the most in more than three decades, but real wages fell for a fourth consecutive month. 

“Prices have been rising more than expected and real wages keep falling, which continues to hold back consumption,” said Takeshi Minami, economist at Norinchukin Research Institute. “People can’t loosen their purse strings because they aren’t confident that wage increases will continue.”

The central bank has signaled caution over the timing of its next interest rate hike, with Governor Kazuo Ueda seeking confirmation that strong wage momentum will carry over into the spring negotiations between companies and labor unions. The BOJ is set to wrap up its next policy decision meeting on Jan. 24. 

Even if wage growth stays robust, fragile consumption may give the BOJ another reason to pause, given it indicates a limit to the virtuous economic cycle the central bank is seeking. 

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In its branch managers report Thursday, the BOJ also signaled it sees progress on wage hikes, although comments weren’t strong enough to make either January or March more likely as the next timing for a rate hike.

“The BOJ could raise interest rates in January,” said Minami. “But they may wait until March or April if they opt to confirm data including the results of the spring wage talks.”

Private consumption accounts for more than half the economy and it was one of the main drivers for growth in the three months through September, partly because of a one-off tax cut implemented in the summer. 

In late 2024, Prime Minister Shigeru Ishiba added fresh aid for low-income households to cope with inflation, through his economic stimulus package. The yen’s weakness has also weighed on the purchasing power of Japanese households as it makes imports of food and energy more expensive. 

(Updates with economist comments, additional background.)

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