Japan's household spending up but price rises weigh on outlook

By Daniel Leussink

TOKYO (Reuters) -Japan's household spending rose for a second consecutive month year-on-year in February, helped by a flattering comparison with last year's sharp pandemic-induced slump but the consumer sector is now facing growing headwinds from soaring prices.

Households cut spending from the previous month as pandemic curbs, rapid food and fuel price rises and the coronavirus kept wallets shut, casting a shadow over the world's third-largest economy.

In a sign of trouble for consumer sentiment, real wage growth stagnated in February as global inflationary pressures weighed on household purchasing power.

"Prices will outpace wage gains from now on, so consumption will be on a sluggish trend," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"While service spending is expected to pick up from April onwards, the likelihood is big that higher prices will weigh on other areas of consumption," Minami said, adding that spending was likely to pick up nonetheless.

Household spending increased 1.1% in February from a year earlier, government data showed, much weaker than the market forecast of a 2.7% gain in a Reuters poll.

The month-on-month figures showed a sharp 2.8% decline, also weaker than a forecast 1.5% drop.

The data raises some concerns for policymakers looking for ways to offset the hit households are taking from soaring global inflation and a weakening yen, which is pushing up import costs, as the economy shakes off the pandemic's drag.

Households increased spending on mobile phones as well as car insurance and parts such as batteries on pent-up demand due to price hikes, a government official said.

But slower spending on eating out, including on sushi, weighed on expenditures, as authorities prolonged pandemic curbs in response to a wave of Omicron infections during the month.

A separate survey showed that Japan's services sector activity continued to shrink in March, though the pace of contraction slowed as domestic demand got a lift from the subsequent easing of the pandemic curbs last month.

Other government data on Tuesday showed inflation-adjusted real wages hit a standstill in February, as growth of consumer prices offset gains in nominal wage growth.

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The economy is projected to grow in the current quarter following an expected contraction in the first three months of the year, though it is facing an unpredictable outlook in part due to the Ukraine situation and the weak yen.