MNI ANALYSIS: Japan Consumption To Back GDP Despite Wage Drop

By Max Sato

     TOKYO (MNI) - The latest data show continued weak wage growth but consumer

spending is still expected to continue to support Japan's modest economic

recovery, at least for now.

     Total monthly average cash earnings per regular employee in Japan fell 0.6%

on year in July, revised down from the 0.3% drop reported in preliminary data,

as the decline in summer bonuses was steeper than initially reported, data from

the Ministry of Health, Labour and Welfare released Friday show.

     It was the first year-on-year drop in 14 months after a 0.4% rise in June,

but government officials argued the gradual uptrend remains intact. Bonuses and

other special pay fell 3.1% in July from a year before, revised down from the

initial reading of a 2.2% drop. It was the first drop in six months after +0.4%

the previous month.

     But base wages, the key to a recovery in cash earnings, rose an unrevised

0.5% in July, the fourth consecutive year-on-year gain, although the pace of

increase slowed from the recent high of +0.7% in May. Hourly base wages of

regular employees working part time gained 2.5% on year, revised down from a

preliminary +2.9%.

     "I wouldn't be surprised if bonuses in August fell, given various surveys

pointing to year-on-year declines, but our assessment is unchanged that wages

are increasing gradually," a ministry official said.

     "When the share of special pay decreases after the summer, wages are

expected to show a modest rise, led by base wages."

     The government sees private consumption picking up moderately while the

Bank of Japan says consumption has increased its resilience.

     Economists expect GDP growth will slow down from an unusually high pace in

April-June but also forecast consumption will prop up the total domestic output

while exports face uncertainty over global growth.

     "The weak summer bonuses will affect sentiment and propensity to spend in

the longer term," warned Norinchukin Research Institute chief economist Takeshi

Minami.

     "Private consumption doesn't seem to be as strong as the government says

but it is likely to support economic growth until the end of next year or early

in 2019."

     The MNI median economist forecast for August average household spending due

on Sept. 29 is a real 1.1% rise, following a decline of 0.2% in July and a surge

if 2.3% in June. The forecasts by 14 economists ranged from +2.3% to -0.6%, with

Minami's forecast at the top of the range.

     Mitsubishi UFJ Research and Consulting economist Shinichiro Kobayashi

expects household spending to have slipped 0.6% on year, adding that the recent

solid tone remains intact.

     "Long rainy days in eastern to northern Japan dampened demand for seasonal

goods but data from department stores and supermarkets showed sales were firm on

a national level. So we don't think household spending in August was so weak,"

he said.

     "Consumer sentiment is rising along with higher share prices and there is

less fear about losing jobs at this point. On the other hand, wage growth is

weak and so is unlikely to provide strong support to spending."

     Combined same-store department store sales rose 2.0% on year in August,

posting the first rise in two months after falling 1.4%, as lower temperatures

supported late summer to autumn clothing sales, the Japan Department Stores

Association said Thursday.

     But Kobayashi noted consumer spending still lacks strength as people are

concerned about the sustainability of the social security system.

     "The propensity to spend is falling while the savings ratio is rising.

Consumption has been rising only slowly, at an annual pace of under 1%, compared

to 2% when it was strong," he said.

     Data released earlier this month showed April-June GDP growth was revised

down sharply to +0.6% on quarter, or an annualized +2.5%, from the preliminary

estimate of +1.0% on quarter, or an annualized 4.0%. This was largely because

business investment turned out to be slower than previously reported, but

economists welcomed the revision as it means the economy was expanding at a more

sustainable pace.

     Private consumption was revised down slightly but it remained the key

driver, with its contribution to the Q2 GDP growth of 0.6% unrevised at +0.5

percentage point. The contribution of capex was revised down to +0.1 percentage

point from +0.4 percentage point.

     Drops in factory output and household spending in July indicated the

economy started the July-September quarter with a softer tone after growth far

above its potential in the previous quarter. Bad weather is expected to slow

strong consumption seen in Q2 but at the same time, external demand is likely to

rebound in Q3 after a temporary slip in exports to Asia in Q2.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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