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Japan's household spending extends growth but inflation risks loom

·2 min read
Shoppers are reflected on a wall mirror at a supermarket in Tokyo, Japan

By Kantaro Komiya

TOKYO (Reuters) -Japan's household spending grew for a second straight month in July despite a resurgence in COVID-19 cases, but inflationary pressures from the yen's slump to a 24-year-low have cast doubt over a revival in consumption.

From falling real wages to shrinking service sector activity, data this week has shown private consumption stalling, undermining some of the gains made in April-June.

"Rising prices without wage growth can be an obstacle to the private consumption recovery in the next six months," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

Household spending rose 3.4% in July from a year earlier, government data showed on Tuesday.

The reading was lower than economists' median estimate for a 4.2% gain and followed 3.5% growth in June.

Compared with a month earlier, spending decreased 1.4% in July, bigger than the forecast 0.6% fall.

The month-on-month spending drop could be because consumers felt less confident visiting shops due to rising coronavirus cases, a government official told reporters.

Japan saw a rapid increase in COVID cases in the month and reported the world's highest infections in the week of July 24.

But the government has not reinstated curbs and instead hopes to reopen the fragile economy that in April-June finally regained pre-pandemic levels, lagging global peers.

The double-digit expansion in leisure items boosted spending growth compared with July 2021 when restrictions on face-to-face services kept consumers at home, the official said. Hotel expenses grew 55% year-on-year, while transport fees were up 48%, according to the data.

The biggest risk Japanese consumers face is rising prices, analysts said, as global commodity inflation and a weak yen jacked up the cost of imported goods. The yen fell beyond 140 per dollar for the first time since 1998 last week.

If the yen remains at 140 per greenback for the next six months, Japanese households will be forced to spend 1.3% more than the previous year for food, energy and other essential costs, according to an estimate by Saisuke Sakai, senior economist at Mizuho Research and Technologies.

"Households are taking the hit of higher inflation with the yen's further decline, which inevitably drags down private consumption," he said, adding the chance of Japan's core inflation hitting 3% in the final three months of this year is heightening.

Shinkin's Tsunoda said the private consumption outlook was not all grim despite low wage growth, with Japanese households becoming less sensitive to COVID-19 outbreaks and embracing the economic reopening.

"Japan's return to a pre-pandemic economy has lagged the U.S. or Europe, so there's still room to recover," he said.

(Reporting by Kantaro Komiya; Editing by Sam Holmes)