TAX, SURPRISES LOOM: PAGE 6 – Consumers unexpectedly cut back on spending two months before the first sales tax increase since 1997, in a potential sign that emerging inflationary pressures are undermining purchasing power.
Household spending fell 2.5 percent in February from a year earlier, the first drop in six months, the government said Friday, compared with a median estimate of economists for a 0.1 percent rise.
Retail sales slowed, while a measure of inflation that strips out energy and fresh food increased the most since 1998.
While the data, which include a measure of demand for workers approaching a two-decade high, offer policymakers confidence that their drive to end deflation is working, they also flash a warning sign. Without wage gains, the danger is that the end of 15 years of sustained price declines will damage the economy.
“Households are suffering from inflation as their incomes haven’t grown much,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “People are purchasing durable goods to save money before the sales tax hike, so they have to cut back on non-durables.”
The splurge on hard goods comes despite their prices rising in February at the fastest pace since April 1980. Prime Minister Shinzo Abe said Thursday that the economy has reached a stage that cannot be called deflation.
Household spending on clothing and footwear fell 9.2 percent from a year earlier. Outlays on furniture and household goods soared 25.4 percent.
Finance Minister Taro Aso said Friday that the administration will front-load spending in the budget for the fiscal year starting Tuesday, adding that the fall in consumer spending is a problem.
Japan is set for a one-quarter contraction in the next three months as spending slows after the consumption tax rise to 8 percent on Tuesday. Abe has to steer the nation through the aftermath, and the Bank of Japan may decide by May whether to add to unprecedented stimulus.
“The BOJ should start thinking about adding more stimulus in early June,” said Takuji Okubo, chief economist at Japan Macro Advisors.
Junko Nishioka, chief economist at Royal Bank of Scotland Group in Tokyo, said core inflation will probably settle around 1.2 percent or 1.3 percent over the next six months.