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In one of his recent testimonies, BOJ Governor Kuroda said that the sales tax hike is causing “economic fluctuations.” Are we seeing these in the latest set of data from Japan?


Perhaps the economic aspect that is hardest hit by the April sales tax increase from 5% to 8% is spending, and the latest retail sales and household spending reports confirm just that. Recall that retail sales slumped by an annualized 4.3% in April while household spending showed a 4.6% year-over-year decline.

For the month of May, these reports painted an even more interesting picture, as retail sales came in stronger than estimated with only a 0.4% downtick yet household spending sank by a worse than expected 8.0%. Analysts expected to see an annualized 1.9% drop in both retail sales and household spending.

Apparently sales at large scale retailers wasn’t as bad as expected, which explains the smaller than estimated drop in retail sales. However, monthly income per household reflected a 4.6% year-over-year drop, which is probably why household spending had a sharper drop.


Inflation figures, on the other hand, continued to show strong price pressures. After all, the sales tax hike was estimated to add roughly 2% to Japan’s core inflation rate in the coming months.

For May, Tokyo core CPI held steady at 2.8% while the national core CPI climbed from 3.2% to 3.4%. These mark the fastest pace of inflation in 32 years! Leading the price gains were the 11.4% increase in electricity charges, 9.6% rise in gasoline prices, and the 14.3% jump in seafood prices. However, BOJ Governor Kuroda cautioned that annual CPI could slow to 1% in the coming months, before resuming its climb towards the end of the year.


All seems well on the jobs front, as Japan’s May unemployment rate fell from 3.6% to 3.5% – its lowest reading since December 1997. Other labor market indicators, such as the jobs-to-applicant ratio and the participation rate, also showed improvements.

As I mentioned earlier though, the weak spot in Japan’s labor situation is income growth. Wages including bonuses and overtime pay has been falling each month for nearly two years already. “Uncertainties remain for consumer spending as it’s hard to imagine households will stay willing to spend when their real income is clearly dropping,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research.

BOJ Governor Kuroda pointed out that the Japanese central bank won’t hesitate to dole out another round of stimulus if needed. Judging from his remarks though, it appears that the BOJ is more focused on tracking inflation figures rather than income and spending growth. Do you think the BOJ will announce further QE soon?