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Japan household spending unexpectedly falls, clouds BOJ rate path By Reuters

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 rebound in coming months as big wage hikes offered by companies and a tax break aimed at cushioning the blow from rising living costs reach households.

But the soft reading underscores the fragile nature of consumption, and casts doubt on the Bank of Japan’s (BOJ) view a solid economic recovery will keep inflation durably around its 2% target – a prerequisite for raising interest rates.

“The BOJ has been saying all along that consumption is firm. Today’s data could force the bank to alter that view and make it difficult 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, far short of the median market forecast for a 0.1% uptick, as rising food prices weighed on spending for other items, data showed.

Demand for overseas package tours also fell due to the weak yen, which makes travelling abroad expensive. Spending fell 0.3% in May on a seasonally adjusted, month-on-month basis.

A separate index compiled by the BOJ on Friday, which strips away the impact of inbound tourism, also showed consumption was flat in May from the previous month, slowing from a 1.0% gain in April.

The BOJ index is based on data from suppliers of goods and services. It is closely watched by the central bank as a more comprehensive gauge of consumption than the government’s household spending data, which is based on surveys filled in by a selected pool of households.

The soft reading comes in the wake of an unexpected downward revision to Japan’s first-quarter gross domestic product (GDP) and a slew of surveys showing worsening consumer sentiment.

Sluggish private consumption is a source of concern for policymakers striving to achieve sustained economic growth underpinned by solid wages and durable inflation, which are prerequisites for normalising monetary policy.

BOJ Governor Kazuo Ueda has said he expects consumption to recover as big wage hikes offered by many firms, and government subsidies to curb electricity bills, prop up household income.

Japanese firms offered to hike pay by 5.1% on average this year, the biggest hike in 33 years and exceeding inflation now hovering around 2%, a labour union survey showed on Wednesday.

Many analysts expect the BOJ to hold off on raising rates this month to await more evidence that wage hikes will spread to smaller firms and boost consumption.

But some suspect that rising inflation, driven in part by a weak yen that boosts import costs, may prompt the BOJ to act.

“The BOJ will probably stick to its view the weakness in consumption will prove 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 hurting consumption, and feels the need to forestall the risk of further price rises.”

© Reuters. FILE PHOTO: A view of a vegetable stand with prices at a supermarket in Tokyo, Japan, March 24, 2023. REUTERS/Androniki Christodoulou/File Photo

The BOJ next meets for a policy meeting on July 30-31, when it will also produce fresh quarterly growth and price forecasts that serves as a basis for deciding future monetary policy.

Japan’s economy shrank more than initially reported in the January-March quarter in a rare, unscheduled revision to GDP data. But many economists expect growth to rebound this quarter thanks to higher wages and robust capital expenditure.

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