Japan: Firmer consumer spending - Nomura

Analysts at Nomura point out that Japanese data on consumer spending has been firm as average real household consumption expenditure (Family Income and Expenditure Survey (FIES) basis, excluding housing and other volatile items) in Apr-May was 1.0% higher than in 2017 Q1.

Key Quotes

“Real retail sales (derived by Nomura by adjusting the nominal retail sales data from METI’s Current Survey of Commerce for inflation using the CPI) has been firm, with the average for AprMay 1.2% higher than that for Q1. Similarly, in its June Monthly Economic Report the Cabinet Office raised its assessment of consumer spending to "picking up moderately." GDP-based consumer spending in Q2 looks likely to have grown more than we expected three months ago. We therefore raised our forecast for consumer spending in Q2 on 8 June, when we updated our economic forecasts. We see stronger-than-expected growth in consumer spending as an upside risk in the months to come.”

“At the moment, however, we see the firm trend in consumer spending in Q2 as a one-off. The problem, as we see it, is the factors behind the firmness of consumer spending. We see no sign of a pickup in wage growth and no reason to believe that the pickup in consumer spending has been driven by an increase in income. We attribute the pickup in consumer spending to an improvement in consumer confidence. According to the Cabinet Office's Consumer Confidence Survey, the Consumer Confidence Index reached its highest level in nearly four years in March of this year. We cannot rule out the possibility that it may be this that led to a pickup in consumer spending in Q2.”

“We suspect that the reason consumer confidence has improved in the absence of a pickup in wage growth is a decline in inflation. The Consumer Confidence Index and household inflation expectations tend to have a negative correlation, something we attribute to the inverse relationship between inflation expectations and real income expectations. The decline in inflation in 2016 as a result of the strength of the yen may have led to lower inflation expectations and, conversely, higher real income expectations that have translated into a pickup in consumer confidence.”

“However, the downward pressure on inflation from the strength of the yen is easing and the core CPI inflation rate is likely to rise. It therefore makes sense to assume that this will put a damper on the pickup in consumer confidence. This appears to be borne out by a rise in household inflation expectations in April accompanied by a lull in the rise in the Consumer Confidence Index. Our view remains that consumer spending is likely to start to slow in 2017 H2 as inflation picks up.”