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Japan's household spending rebounds but outlook gloomy

Japan's household spending rebounds but outlook gloomy

Japan's household spending rebounded into positive territory in December, but the modest 0.1% rise was short of a medium market forecast and will do little to allay fears that the economy could stall in 2019 as risks to growth increase.

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11.02.2019 09:49 PM

Japan's household spending rebounded into positive territory in December, but the modest 0.1% rise was short of a medium market forecast and will do little to allay fears that the economy could stall in 2019 as risks to growth increase.

New data released by the government on Friday showed the first increase in household spending for four months. However, the modest year-over-year uptick in December was short of a 0.8% increase forecast earlier this month.

There was also a 1.4% rise in inflation-adjusted real wages during the final month of last year, though there was another caveat as the increase was driven mainly by a hike in bonuses for the winter. This is evidenced in the slower rise of 0.9% for regular pay, which makes up the vast majority of monthly wages. Regular pay had increased by 1.3% in November.

The trend of modest yet underwhelming rises for both spending and wages point to a rather gloomy outlook due to the uncertainty of the economic environment. Analysts believe a slowdown in global demand, the rise of trade protectionism and inherent volatility of regional markets will prompt enterprises to hold off on further wage hikes during the remainder of the year.

There are also concerns that the economic recovery trumpeted by Prime Minister Shinzo Abe may not be delivering broader benefits, especially after the government admitted in January that it had understated wages data for over ten years due to the use of flawed polling methods.

Analysts said the error was an embarrassment for Abe as it undermined the government's efforts to reduce the risk of deflation. UFJ Morgan Stanley Securities senior economist, Hiroshi Miyazaki said at the time: "Escaping deflation is Abe’s biggest economic goal, so if you can’t trust the data you can’t make appropriate policy decisions."

The good news is that consumption is holding up for now after remaining steady during the final quarter of 2018 as household purchasing power was bolstered by a drop off in petrol and vegetable costs. Household spending climbed 0.2% in Q4 compared to the previous three-month period, which strengthened sentiment that the economy was able to recover from a series of natural disasters in Q3.

"When you look at the October-December quarter, consumption fared fairly well and will probably contribute positively to gross domestic product (GDP) growth," Dai-ichi Life Research Institute chief economist, Yoshiki Shinke said on Friday.

He added: "But companies may not raise wages much this year because there is so much uncertainty on the global economy. There's a small but likely chance the economy may contract again in January-March." The government is set to release official GDP data later this week.

While the recent increase in consumption is a plus point for the economy, there is uncertainty about its ability to offset a marked weakness in exports, which has been prevalent since the onset of the US-China trade conflict. The seven-month long battle is now slowing global demand and continues to hamstring business sentiment.

There are also concerns about a possible recession after exports slumped by the largest margin for two years in December and manufacturing stalled in January. The Bank of Japan does have tools at its disposal, though its heavy money printing drive has failed to push inflation anywhere near its 2% target.

Norinchukin Research Institute chief economist, Takeshi Minami is also pessimistic about the medium-term outlook. He said: "Consumption may lose momentum this year as household income isn't rising quickly enough. As trade frictions heighten uncertainty over the growth outlook, businesses won't raise base pay much this year and households will become more cautious about spending."

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