Japan’s households have continued to cut back on spending as sticky inflation discouraged discretionary outlays.

Outlays decreased 0.5% in February from a year ago, sliding for a 12th consecutive month, the internal affairs ministry reported Friday. The decline narrowed from a 6.3% drop in the previous month and compared with economists’ forecast of a 2.9% retreat. Spending rose 1.4% from a month earlier, the first advance since September.

Friday’s results show the impact of persistent price increases on spending patterns. The key nationwide gauge for consumer inflation has hovered at or above the Bank of Japan (BOJ)’s 2% target for almost two years. Even with workers having achieved large pay gains last fiscal year, real wages have fallen for 22 consecutive months, with data due Monday expected to show the downward trend extending for another month.

That trajectory may change later this year. Annual wage talks this year are on track to result in wage gains exceeding 5%, the highest in more than three decades. At that pace, pay increases that would comfortably outstrip inflation, which is forecast by economists to slow to 2.3% in 2024.

"Spending continues to be weak due to the impact of inflation, but on a month-on-month basis, it turned positive for the first time in five months,” said Yuichi Kodama, economist at Meiji Yasuda Research Institute. "Strong wage hikes are definitely happening and inflation is peaking out, which will be reflected in data from April, and real wages may turn positive as early as June. That will be a tailwind for consumption.”

The robust pledges on wages were a key factor in the BOJ’s decision last month to end its negative rate regime with its first hike since 2007. Even before the strong wage negotiation results began to emerge last month, the central bank was somewhat optimistic about the prospects for rising wages feeding into demand.

In its January outlook survey, the BOJ board said tight labor conditions would help fuel pay increases.

"Against this backdrop, although private consumption is expected to be affected by the price rises, it is projected to keep increasing moderately for the time being,” the report said. It will update its projections later this month.

Kodama said the BOJ might conduct another rate hike as early as July.

In Friday’s report, spending on utilities declined 19%, exerting the biggest drag on outlays. Among areas where spending increased were education, which rose 42%, and food, which edged up 2%.

In a positive signal, Japan’s economy saw demand rise to a level slightly exceeding supply in the final quarter of 2023 for the first time in almost four years. Also, the consumer confidence index has risen for the last five months.

Risk factors for the personal consumption outlook include the yen, which weakened to a 34-year low against the dollar last week, a development that will keep upward pressure on prices for imports of food and raw materials. The prices of more than 2,800 food and drink items were scheduled to be increased this month, the most in a single month since October, according to Teikoku Databank.

Another threat is the government’s plan to end utility subsidies at the end of May, a move that will likely hit households hard this summer.

Lackluster consumer spending has been a drag on the country’s economic recovery path. Japan barely avoided entering a recession in the final three months of the last year, as strong corporate investment offset weak private spending. Some economists expect the country’s economic growth to slow this year partly due to subdued consumption.

Prime Minister Fumio Kishida is paying close attention to whether the virtuous wage-price cycle will gain momentum. The Cabinet Office recently downgraded its assessment for private consumption in its monthly economy report.