(Bloomberg) -- Japan’s households cut back on spending in July while real wages fell again amid a surge in virus cases and a steady increase in the cost of living, suggesting the country’s recovery path is still shaky.
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Household outlays dropped 1.4% from June as spending on furniture, clothing and insurance fell, the ministry of internal affairs reported Tuesday. Spending was 3.4% higher than a year ago, compared with a 4.6% gain forecast by analysts.
Another report showed wages adjusted for inflation continued to fall while nominal wage growth slowed, pointing to a further decline in households’ purchasing power.
The drop in real consumer spending, which accounts for the impact of inflation, adds to signs that the economic recovery from the pandemic remains fragile. The summer saw a record jump in infection cases though the government has continued to refrain from reinstating virus-related restrictions.
“Pent-up demand has been peaking,” said Hiroaki Muto, economist at Sumitomo Life Insurance Co. “I think such a surge in infection cases caused some consumers to hold back activity on their own even though there’s been no mobility restrictions.”
Rising prices, especially for daily necessities like food and utilities, are hitting consumers who hold the key for the continuation of the economic recovery. Prime Minister Fumio Kishida is set to compile a new round of measures to limit the impact of inflation in September.
Inflation remains moderate in Japan, but the nation’s dependence on imported food and energy is making the impact tangible and acute for consumers and businesses. The yen’s slide to a 24-year low against the dollar is also amplifying the pain -- a trend that’s increasing this month as the yen hit fresh lows.
What Bloomberg Economics Says...
“The higher inflation and lower incomes that shaved Japan’s household spending in July are likely to weigh on this quarter’s recovery. Continued declines in inflation-adjusted wages also reinforce the case for Bank of Japan easing.”
-- Yuki Masujima, economist
To read the full report, click here.
Japan’s economy has returned to its pre-pandemic size, but officials have stressed the need to keep policy support in place to help consumers and companies deal with rising prices. The Bank of Japan is also keeping interest rates at rock-bottom levels to support the economy, saying inflation remains unsustainable without more robust wage growth.
The latest wage data showed cash earnings rose at a slower pace of 1.8% from a year ago in July, according to the labor ministry. Real wages adjusted for inflation dropped 1.3%, falling for a fourth straight month, meaning workers’ purchasing power is continuing to weaken.
“Wages are picking up slowly, but a drop in real wages works against consumption,” said Sumitomo Life’s Muto. “It’s a critical blow for spending that wages are not keeping up with inflation.”
(Adds more details on wages data, economist comments)
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