Japanese household consumption fell despite rebounding external demands

shutterstock_65354356-2By Stephanie Tsui

The Japanese economy saw noticeable turnaround in October, with industrial production and exports rising 1.4% and 2.1% m-o-m respectively. Meanwhile, employment and wages also grew by 0.7% and 0.6% y-o-y respectively in Q3. Economists have suggested that the government should not ease monetary policy further aimed at meeting the current inflation target in order to ensure sustainable growth.

Growth was mainly driven by externally-orientated sectors such as machinery and transport equipment. The  shipments outpacing production  have helped to eat into the recent inventory overhang, according to Standard Life Investments.  After a sharp 26.1% m-o-m fall in August, overseas orders rebounded 4.8% m-o-m in September.

Nevertheless, domestic private consumption is more critical for the Japanese economy, which accounts for fully 60.9% of GDP. Although retail sales presented a cheery picture, expanding 1.8% y-o-y in October, it is reported to be supported primarily by overseas tourism spending rather than domestic demand. A household spending survey shows that real core consumer spending fell by 2.4% y-o-y, implying that real incomes still saw few improvements.

The CPI, ex-fresh food and energy, rose 1.2% y-o-y in October. Economists suggest, however, that the government should not adjust its policies, currently aimed at achieving its 2% inflation target, simply in response to the mild increase in wages. “Any further policy easing would serve to stifle Japan’s economy,” noted Govinda Finn, Senior Analyst, Global Strategy, Standard Life Investments. He pointed out that a monetary easing policy might prop up spending in the very near term, but it would risk a retrenchment in household spending in the medium term as inflation expectations fell and consumption was postponed.

Instead, the government should give the households the confidence that wage growth in excess of 2% will be sustainable due to an increase in the economy’s growth potential. “The ball is still firmly in the court of policymakers, a greater commitment to the targets set out should be forthcoming.” The asset manager concluded. BM