(June 29): Japan’s retail sales rose in May for a third month, powered by strong wage gains and government subsidies to ease the cost of living.
Sales increased 1.9% after an upwardly revised gain in April, the economy ministry reported on Monday. The figure exceeded all estimates in a Bloomberg survey of economists. From a year earlier, sales rose 5.3%, compared with the consensus forecast of a 3% gain. The figures are not adjusted for inflation.
The broad advance was led by sales of vehicles, pharmaceuticals and cosmetics. Sales at department stores also climbed strongly from a year earlier, likely helped by robust tourist spending. Sales of seasonal appliances like air conditioning nearly doubled from a year earlier, suggesting consumers rushed to beat an upcoming government policy that will tighten efficiency standards and ban models that don’t meet the new requirements.
However, there were also signs that households are growing more discerning. Monday’s data showed sales at drugstores rose more than 7% from a year earlier while sales at convenience stores, which are more expensive, grew at a slower pace. That potentially reflects a shift towards lower-priced options.
The reading suggests consumer demand is holding up on the back of a long stretch of wage gains outpacing inflation and assistance from Prime Minister Sanae Takaichi’s subsidies. But it’s unclear how sustainable that demand is with underlying price trends showing signs of accelerating and the Bank of Japan (BOJ) steadily raising interest rates.
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“The basic view is that consumer spending has held up so far, but if the data begin to show a clear deterioration, the government and the BOJ will have little choice but to factor that into their policy decisions,” said Masato Koike, senior economist at Sompo Institute Plus. “Consumer spending will be a key indicator going forward, and I believe the risks are skewed to the downside.”
Solid consumption remains a key element of the demand-led economic cycle, a condition sought by the BOJ as it continues to raise interest rates towards a more normal setting. BOJ governor Kazuo Ueda last week reiterated his stance to keep hiking rates if the economy, inflation and financial conditions evolve in line with the bank’s outlook.
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While government subsidies are so far helping to keep inflation gauges below the BOJ’s 2% target, officials are worried about underlying trends. Prices on more than 1,000 food and beverage products rose this month, up from just 84 in May, according to a report by Teikoku Databank.
Consumers are also worried about the lingering impact to prices from the war in Iran. A Cabinet Office survey in May showed more than 90% of households still expected prices to be higher in a year.
Supermarkets and drugstores offer lower prices than convenience stores across virtually all food and daily necessities, according to the internal affairs’ ministry’s annual study released at the end of the last year. Drugstores were cheaper than supermarkets for most products other than beer, with particularly large discounts on items such as bread and chocolate.
Even after the US and Iran signed an interim peace deal, the Middle East situation remains fragile, creating a risk for persistent inflationary pressures in Japan. Higher crude oil prices and tighter naphtha supplies have already raised costs for businesses, prompting them to pass those costs onto customers.
Uploaded by Liza Shireen Koshy
