MNI INSIGHT: BOJ Sees Risk Of Slowing Consumer Demand In Q3

Bank of Japan officials see a risk that private sector spending could slow in Q3 as the cost-of-living crisis and a fresh rise in Covid cases weigh on sentiment, impeding the recovery from the pandemic after the economy started to pick up in the second quarter, MNI understands.

The latest data from the government showed consumer sentiment fell for a second straight month in July, with measures for the current position and the three-months ahead outlook both under pressure.

The Economy Watchers sentiment index for the current economic climate fell a seasonally adjusted 9.1 points to 43.8 in July from 52.9 in June, while the outlook index for two-to-three months ahead fell 4.8 points to 42.8 from 47.6.

REAL INCOMES DOWN, COVID CASES UP

Economists at the BOJ saw rising costs and Covid as the drivers behind declining sentiment, with the face-to-face service sector struggling as cases rise again and cap the pent-up demand that was starting to emerge.

Higher prices across the food sector are having an even bigger impact, as inflation runs ahead of wage gains and constrains consumer demand.

In recent weeks, many Japanese have returned home to visit families for the first summer holiday season in three years, as the government imposed no restrictions despite rising infections. However, some groups, including the elderly and more vulnerable, are still cautious about re-engaging with the wider world.

How Covid cases develop in the coming weeks will therefore be key to a recovery in the service sector, particularly in the hospitality industries.

The BOJ still sees both exports and industrial production continuing the recovery as supply-side constraints ease, although the global shortage of semiconductors continues.

Preliminary data released Monday showed that a third consecutive quarter of positive GDP growth helped Japan’s economy recover in the second quarter to its pre-Covid levels. Q2 GDP rose 0.5% q/q, or an annualized +2.2%. Private consumption, which accounts for about 60% of the country’s GDP, rose 1.1% q/q in Q2, in line with analyst expectations.