By Japan’s consumer confidence has weakened in December, a recent government survey reveals, raising concerns about the central bank’s assumption that robust household spending will prop up the economy and justify an increase in interest rates.
This downturn in consumer sentiment, coupled with other economic indicators, has added complexity to the Bank of Japan’s (BOJ) decision-making process, especially as they prepare for their upcoming policy meeting on January 23-24.
Consumer confidence dips amid economic uncertainty
The survey by the Cabinet Office showed that an index measuring consumer sentiment fell to 36.2 in December, a 0.2 point drop from the previous month.
This decline in confidence suggests that Japanese households are becoming more cautious, potentially impacting consumer spending, which is a critical component of economic growth.
Output gap remains negative, signaling weak demand
Adding to the concerns, separate data revealed that Japan’s output gap, which measures the difference between the economy’s actual and potential output, remained negative for the 18th consecutive quarter in July-September.
A negative output gap is a sign of soft demand, with actual output falling short of the economy’s full capacity.
This further underscores the fragile state of the Japanese economy, which is facing challenges from rising living costs and uncertainty surrounding US President-elect Donald Trump’s policies, both of which are impacting consumption and exports.
Wage increases and inflation goals
Despite these challenges, some major firms have signaled their intent to continue with significant wage increases.
Fast Retailing, the owner of clothing brand Uniqlo, announced it would increase wages for full-time headquarters and sales staff by as much as 11% starting in March. Sadanobu Takemasu, president of convenience store Lawson, told reporters on Tuesday, “We’d like to raise (wages) stably and sustainably,” reflecting a commitment to improved compensation for workers.
The BOJ exited a massive stimulus programme in March and increased short-term rates to 0.25% in July, reflecting its belief that Japan was on the verge of achieving its 2% inflation target.
BOJ’s delicate balancing act
BOJ Governor Kazuo Ueda has stated that the central bank is prepared to further raise interest rates if Japan continues to move closer to its goal of sustainably achieving 2% inflation.
He has also emphasized the importance of closely examining data on wage growth to gauge when to raise rates.
The BOJ currently describes consumption as “increasing moderately as a trend” and believes the Japanese economy is on a path to a modest recovery.
This conflicting economic data, however, is presenting a challenge for policymakers at the central bank.
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