Room For Growth in Japanese Consumer Spending

The Case for a Stronger Consumer in Japan

After almost two years of aggressive monetary policy easing, the Japanese economy is experiencing the inflation it has worked so hard to achieve. Unfortunately, the rising price environment has stalled consumer spending. A gradual firming in the Japanese labor market has translated into modest nominal income gains, but consumer prices have outpaced wages, and on a price-adjusted basis, wages are down.

In October 2014, the Bank of Japan (BoJ) increased the pace of its quantitative and qualitative easing program (QQE) in response to falling oil prices and what it deemed “somewhat weak developments in demand following the consumption tax hike.” Consumer spending fell at an annualized rate of more than 18 percent in the second quarter of 2014 and after two tepid quarters of less than 1.2 percent growth, it has not shown much improvement (Figure 1).

Among the largest advanced economies of the world, Japan had the lowest CPI inflation rate from the turn of the 21st century until the start of QQE in 2013. Since 2013, however, CPI inflation in Japan has picked up on trend even as slower inflation or outright deflation has gripped the other major economies and Japan now has a higher rate of CPI inflation than the other major advanced economies. 

In this piece, we look at the current state of consumer spending in Japan in the context of the swings in inflation. Our takeaway is that a big reason why consumer spending has been so weak is that, despite nominal wage increases, real wages are down. As we approach the anniversary of the April 2014 consumption tax increase, CPI should slow with a corresponding boost to real wage growth. Significant gains at annual wage negotiations taking place this spring would be icing on the cake for what we expect to be an improving environment for Japanese consumer spending.