July 6, 2018 / 12:09 AM / 14 days ago

Japan household spending tumbles but real wages offer glimmer of hope

TOKYO (Reuters) - Japan’s household spending tumbled in May at the fastest pace in almost two years, but real wages rose even more quickly - a possible boost to Japan’s long campaign to change consumers’ deflationary expectations.

FILE PHOTO: Workers are seen at a construction site in Tokyo, Japan June 14, 2016. REUTERS/Toru Hanai/File Photo

Some economists warn this pace of wage growth is not sustainable. Consumer spending is expected to eventually bounce back because of an extremely tight labor market, although probably not by enough to meet the Bank of Japan’s 2 percent inflation target.

“Spending on dining out and clothes did not do well due to cool weather,” said Naoki Hattori, senior economist at Mizuho Research Institute.

“Real wages will rise, but the pace could slow down. The BOJ will stay put on policy because it is unlikely to meet its price target.”

The 3.9 percent annual fall in household spending in May was the largest since August 2016. That missed the median estimate for a 1.5 percent decline from a year ago by a wide margin and follows a 1.3 percent annual decline in the previous month.

Consumer spending accounts for more than half of gross domestic product. The decline in May suggests the chance of achieving the BOJ’s 2 percent inflation target are so distant that it has fallen out of sight for many economists.

Household spending fell in May as consumers spent less on dining out, food, and leisure, Friday’s data showed.

Real wages rose an annual 1.3 percent in May, the biggest annual gain since July 2016, and followed a revised 0.2 percent annual drop in April, labor ministry data showed.

Many analysts expect Japan’s economy to resume growing in the second quarter after a contraction in the first quarter ended the longest continuous expansion since the 1980s bubble economy.

Continued weak spending would also make Japan’s economy more dependent on export demand, which is at risk from the U.S. government’s protectionist trade policies.

Japan’s government is set to forecast overall consumer price growth of 1.5 percent in the fiscal year that starts in April 2019, a draft document obtained by Reuters showed on Friday, undercutting the Bank of Japan’s 1.8 percent prediction.

Reporting by Stanley White; Editing by Eric Meijer

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