Article Highlights

  • June household spending +2.3 pct yr/yr vs forecast +0.6 pct
  • Nationwide core CPI +0.4 pct yr/yr in June, matches f'cast
  • July Tokyo core CPI +0.2 pct yr/yr, fastest since 2015
  • Jobless rate 2.8 pct in June, job availability at 43-yr high
  • Data points to Q2 GDP expansion, inflation way off BOJ target
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Japanese household spending hit its highest for two years in June as unemployment fell and job availability reached a 43-year peak, official figures showed, but inflation gave little sign of getting much closer to the Bank of Japan’s price target.

Indicating that the tightening labor market has yet to fuel inflation, core consumer price gains held steady in June, government data showed on Friday, undermining the BOJ’s arguments that tightness in labor markets will force companies to raise wages and prices soon.

The data also reinforced convictions that the Bank of Japan (BOJ) will lag behind other major central banks in pulling back its massive stimulus.

A summary of opinions from the BOJ’s July 19-20 meeting, also published on Friday, stated it saw the main reason inflation had been slow to pick up was low commodity prices and weak consumer spending – a factor Friday’s data suggests may be changing.

At that meeting, the central bank left monetary policy steady but once again delayed the timing for hitting its price goal, as stagnant wages and disappointing private consumption have hindered hoped-for price gains since it launched a massive stimulus drive in 2013.

Given Friday’s data, optimism on consumption and consumer prices could start to spread, but many economists would argue that the BOJ’s revised timing of around fiscal 2019 for meeting its 2 percent inflation target remains unrealistic.

“The key point is that inflation is set to remain well below the Bank of Japan’s lofty forecasts even after it lowered them in its latest outlook report,” Marcel Thieliant, senior Japan economist at Capital Economics, wrote in a report.

“Policy tightening remains a long way off.”

STEADY GROWTH, WEAK INFLATION

Japan’s economy expanded at an annualized 1.0 percent at the start of this year, posting a fifth straight quarter of growth on robust exports and a pick-up in private consumption.

News that household spending rose annual 2.3 percent in the year to June was an encouraging sign for private consumption, which comprises some 60 percent of the economy.

It handily beat economists’ median forecast for a 0.6 percent gain, posting the first annual increase in 16 months and the biggest year-on-year gain since August 2015.

Retail sales also grew 2.1 percent in the year to June, separate data showed.

Firmer consumption data suggests the tightening job market is gradually helping to raise wages and household incomes, which in turn would stimulate consumer spending.

The jobless rate fell to 2.8 percent in June, and job availability rose to very tight 1.51 jobs available per applicant, up for the fourth straight month and the highest reading since February 1974.

Still, Japan’s consumer price growth remains stubbornly weak because of companies’ wariness about raising prices for fear of losing cost-sensitive customers, accentuating the challenge facing the BOJ in accelerating inflation towards its 2 percent target.

“Strengthening of both external and domestic demand helps tighten the labor market, which will push up wages and prices,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“I think wages and prices are set to rise when companies’ efforts to streamline operations run their course, and it could be possible that the 2 percent inflation can be met around 2020.”

Domestic demand holds the key to sustained expansion as net exports – or exports minus imports – likely trimmed gross domestic product growth in the April-June period, analysts say.

“The economy likely grew at an annualized rate above 2 percent in the April-June quarter backed by domestic demand – private consumption, capex, inventory and public investment – even though net exports probably shaved off growth somewhat,” Minami said.