MNI INSIGHT: BOJ Puzzled By Weak Spending Bounce Post-Tax Hike

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is puzzled by weak consumer spending

against a backdrop of a tight labour market and recovering confidence levels,

with concern growing there may be a repeat of the sluggish recovery seen

following the 2014 sales tax hike, MNI understands.

     Although officials at the Bank still expect private consumption to pick up

in the first quarter, weak spending data in December is giving some pause for

thought, offering no sign yet of a recovery as weak consumer spending extends to

a third month after the October 1 sales tax hike.

     The weak bounce back is a reminder for BOJ economists that the central bank

had to cut rates in the wake a slow consumer recovery after the 2014 sales tax

hike.

     The BOJ had similarly expected private spending to rebound after that tax

hike, but the recovery was slow and a concern there would be a loss of momentum

towards higher prices pushed the Board to ease policy.

     --WEAK AUTO SALES

     The Bank sees and recovery in spending following last year's sales tax hike

as lacking momentum, with sales of automobiles particularly weak. Auto sales

fell 9.5% in December, a third straight drop after falling 14.6% in November and

26.4% in October.

     Despite consumer confidence recovering in December for a third consecutive

month, rising 0.4 points to 39.1, there has been little sign of a pick-up in

household spending, which fell 5.1% in October and 2% in November. Retail sales

fell 2.1% in November after falling 7% in October, although an economy watcher

survey released Jan 14 suggests there may be a modest uptick in December.

     Some Bank officials believe weaker income levels following the government's

latest work place reforms could have weighed on weaker consumer spending.

     --BOJ DATA REBOUNDS

     The BOJ's Consumption Activity Index rose 2.7% on an adjusted basis in

November, coming after a downwardly revised drop of 9.1% in October, although

the uptick did little to assuage concern at the Bank as it did little to offset

the immediate post-tax hike fall.

     Perhaps helping explain the sluggish spending data was the government wage

data that continued to show that overtime working hours and overtime pay have

continued to fall, keeping base wage hikes weak.

     Overtime pay fell for a third straight month in November, down 1.9% y/y.

Bonuses and other special pay fell 3.9% y/y after falling 8.5% fall in October.

Against that, base wages rose 0.2% y/y in November, the fifth straight rise

after October's 0.2% gain.

     Data showed that the work place reform is pushing the fall in overtime

working hours, which is weighing on overtime pay and impeding base wage hikes.

The Abe government has pushed companies to perform work place reforms to improv

labour productivity through innovation, but it is having a detrimental impact

elsewhere.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJI,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]