Japan households cut spending as sales tax and typhoon hit

Japanese households cut their spending for the first time in almost a year in October as a sales tax hike prompted consumers to rein in expenses and natural disasters disrupted business.

Household spending dropped 5.1% in October from a year earlier, government data showed on Friday, down for the first time in 11 months and the biggest fall since March 2016 when spending fell 5.3% and weaker than the median forecast for a 3.0% decline.

That marked a sharp reversal from the 9.5% jump in September, the fastest growth on record as consumers rushed to buy goods before the Oct. 1 sales tax hike from 8% to 10%.

“Not only is the sales tax hike hurting consumer spending but impacts from the typhoon also accelerated the decline in the spending,” said Taro Saito, executive research fellow at NLI Research Institute.

“We expect the economy overall and consumer spending will contract in the current quarter and then moderately pick up January-March but such recovery won’t be strong enough.”

Household spending fell 4.6% in April 2014 when Japan last raised the sales tax to 8% from 5%. It took more than a year for the sector to return to growth.

Compared with the previous month, household spending fell 11.5% in October, the fastest drop since April 2014, a faster decline than the median 9.8% forecast.

Analysts said a powerful typhoon in October, which lashed wide swathes of Japan with heavy rain, also played a factor in the downbeat data. Some shops and restaurants closed during the storm and consumers stayed home.

Real wages adjusted for inflation, meanwhile, edged up for a second straight month in October, but the higher levy and weak global economy raise worries about the prospect for consumer spending and the overall economy.

While the government has sought to offset the hit to consumers through vouchers and tax breaks, there are fears the higher tax could hurt an economy already feeling the pinch from global pressures.

Japan unveiled a $122 billion fiscal package on Thursday to support stalling growth and as policymakers look to sustain activity beyond the 2020 Tokyo Olympics.

A recent spate of weak data, such as exports and factory output, have raised worries about the risk of a sharper than expected slowdown. The economy grew an annualised 0.2% in the third quarter, the weakest pace in a year.

Analysts expect the economy to shrink in the current quarter due to the sales tax hike.

Confidence at big manufacturers in Japan in the three months to December likely worsened to its lowest in nearly seven years, a Reuters poll showed on Friday, as the US-China trade war, a sales tax hike and a huge typhoon knocked the economy.

The Bank of Japan’s quarterly tankan business sentiment survey is expected to show the headline index for big manufacturers’ confidence fell to plus 2 in December from plus 5 three months earlier, the poll of 14 economists found.

That would mark the fourth quarter of worsening confidence and the gloomiest since March 2013 when the index stood at minus 8 - just a month before BOJ Governor Haruhiko Kuroda set in motion the massive stimulus in April 2013.

The sentiment index for big non-manufacturers is forecast to have deteriorated to plus 17 in December from plus 21 marked in September survey, the poll showed.

“Exports remained weak due to the US-China trade friction and the slowing global economy. Also the sales tax increase and a typhoon added further damages,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

“There are positive factors such as a weaker yen and the IT cycle seems to have started rebounding but they are not strong enough to boost business sentiment.”

The outlook didn’t offer much cheer either. Big manufacturers’ business confidence was seen recovering just a touch in the coming quarter to plus 3, while non-manufacturers’ sentiment was expected to edge down to plus 16, the poll found.

Big companies were forecast to raise their capital spending plans by 6.0% for this fiscal year to March 2020, down from 6.6% projected in the September survey. The BOJ will release its tankan survey on Dec.13

A separate Reuters poll of 19 economists forecast Japan’s gross domestic product (GDP) will be revised up to an annualised growth of 0.7% in the third quarter from the initial estimate of a 0.2% rise.

That would translate into 0.2% growth quarter-on-quarter after the initial reading showed the world’s third-biggest economy ground to a near standstill to expand just 0.1%.

Reuters