Household Spending in Japan Increased... But Real Wages Fell the Most in Over 7 Years Due to Inflation

[Asia Economy Reporter Lee Ji-eun] Japan's household spending in October exceeded market expectations, but at the same time, real wages fell at the largest rate in 7 years and 4 months due to the surge in inflation. With prices, income, and household spending intertwined, attention is focused on whether Japan's economic situation can show signs of recovery next year.

According to Bloomberg News and Nihon Keizai Shimbun on the 6th, Japan's Ministry of Internal Affairs and Communications announced that household spending in October increased by 1.2% year-on-year and 1.1% month-on-month. The market had forecast a 1.0% year-on-year increase.

The household spending exceeding expectations is interpreted as a result of pent-up demand from COVID-19 being revived, leading to expanded private sector investment and consumption. The travel subsidy program and the policy allowing the entry of overseas tourists, implemented by the Japanese government since last month, are also cited as factors stimulating the domestic economy.

On the other hand, real wages in October fell by 2.6% year-on-year, continuing a decline for seven consecutive months. This is the largest drop since 2015.

The decrease in real wages is due to the nominal wage growth rate failing to keep up with the consumer price inflation rate. Nominal wages in October rose by 1.8% year-on-year to 275,888 yen (approximately 2,633,130 KRW), marking ten consecutive months of increase. However, the consumer price index (CPI) excluding fresh food rose by 3.6% year-on-year in October, offsetting the wage increase effect.

Bloomberg explained that despite the decrease in real income, household spending has expanded, showing signs of economic recovery. Yoshiki Shinke, an economist at Dai-ichi Life Research Institute in Japan, stated, "It is true that inflation is suppressing consumption, but the consumption sentiment, which was suppressed by COVID-19, is recovering and overcoming inflationary pressures, having a greater impact on the economy." He further predicted that with the expansion of household consumption, Japan's economy will enter a growth phase in the fourth quarter.

However, if the current situation where wage growth fails to keep pace with price increases continues, it is difficult to guarantee that the recovery trend will persist next year. Economist Shinke said, "Wages are still rising, but they are not keeping up with the pace of inflation. Whether economic growth continues will depend on the wage negotiations between labor and management in the spring next year."

In response, the Japanese government also plans to encourage wage increases in the business sector to reduce the burden on households caused by rising prices. Katsunobu Kato, Minister of Health, Labour and Welfare, held a press conference after the Cabinet meeting on the same day and said, "The best prescription for the current inflation is to continuously promote wage increases that are not inferior to it," expressing the government's intention to create an environment where companies can easily raise wages.