Unexpectedly weak household spending casts doubt on BOJ’s optimism

By Leika Kihara

TOKYO (Reuters) – Japan’s household spending unexpectedly slumped in April and consumer inflation was roughly flat, casting doubt on the central bank’s view that a steady economic recovery will help accelerate inflation toward its 2 percent target.

Households spent less on leisure, travel and dining out even as real income rose for the first time in 19 months and the jobless rate fell to a 18-year low, underscoring the challenges of eradicating the sticky “deflationary mindset” that has beset Japan for nearly two decades.

While analysts expect consumption to pick up in coming months, the lingering weakness will keep policymakers under pressure to take steps to underpin a fragile economic recovery.

“Sales of durable goods are still taking a hit, so the (effect of last year’s) sales tax hike is still having an impact,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

“The Bank of Japan doesn’t need to ease now, but data in the second half of the year has to improve.”

Household spending fell 1.3 percent in April from a year earlier, confounding a median market forecast for a 3.1 percent increase, government data showed on Friday.

Many analysts had expected spending to rebound in April from the same month a year earlier, when the government raised the sales tax. Spending also fell 5.5 percent in April from the previous month.

A weak yen and rising hotel charges discouraged households from traveling, while rainy weather during the month kept them from dining out, a government official said.

OUTPUT RISES MODESTLY

The core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 0.3 percent in the year to April, roughly in line with a median market forecast for a 0.2 percent increase.

Analysts expect consumer prices to remain flat or even fall slightly year-on-year until around July or August, due to the effect of a plunge in gasoline prices last year.

In a glimmer of hope, factory output rose 1.0 percent in April, marking the first increase in three months, separate data showed on Friday.

The BOJ is counting on rising wages to boost consumption, which has been a drag on growth, and encourage companies to raise prices, helping accelerate inflation to 2 percent.

But some central bankers have worried that consumers may be reluctant to spend immediately on uncertainty over the outlook.

Many analysts expect the BOJ to expand stimulus again sometime later this year.

Japan’s economy expanded at the fastest pace in a year in the first quarter, emerging from the recession last year caused by a bigger-than-expected impact on consumption from the sales tax hike.

(Additional reporting by Stanley White; Editing by Chris Gallagher and Eric Meijer)

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