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Japan Household Spending Drops, Interest Rate Hike in Doubt

Reuters
Monday, 29 Jan 2007 | 8:36 PM ET

Japan's household spending fell more than expected and the jobless rate rose slightly in December, underlining sluggishness in consumption and raising the hurdle for the Bank of Japan to lift interest rates next month.

Separate data on Tuesday showed that Japan's industrial output rose a higher-than-expected 0.7% in December, underscoring views that corporate activity remains firm.

"Overall, the economic picture has not changed much since December, when the BOJ seems to have started thinking about a rate hike," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities. "The economic figures published so far are unlikely to change the minds of those who supported keeping rates on hold at the previous policy meeting," she said.

Overall household spending in Japan fell 1.9% in December from a year earlier, below a median market forecast of a 1.2% decline. It was the 12th straight month of year-on-year declines.

The yen was little changed near 121.75 yen to the U.S. dollar after the data.

Many economists say the household spending data is flawed due to poor sampling and may be underestimating the health of personal consumption, but the data is the basis of the private consumption component in Japan's gross domestic product.

Bank of Japan Governor Toshihiko Fukui has cited weak consumption as a reason for delaying a rate hike, and traders have focused on consumption-related data for clues on whether the central bank might act at its Feb. 20-21 meeting.

The BOJ kept the overnight call rate target at 0.25% at its January policy board meeting by a split vote of 6-3.

Many economists blame slow rises in wages for sluggish personal demand but expect a tightening labor market to bring wages up eventually and stimulate consumption.

Government data also showed Japan's unemployment rate rose to 4.1% in December from 4.0% in November. Markets had expected the jobless rate to be unchanged.

The December jobs-to-applicants ratio was 1.08, meaning 108 jobs were available per 100 applicants, up from 106 in November. For 2006 the ratio improved to 1.06 from 0.95 in 2005, the first time above 1.00 since 1992, when it stood at 1.08.

Economists said that while industrial production showed a stronger rise than expected in December, weakness in forecasts for manufacturers' output in the coming months remains a concern.

Industrial production rose 0.7% in December from a month earlier, higher than a median market forecast of a 0.3% rise. The trade ministry said manufacturers' output -- the core component of production -- is expected to fall 2.8% in January but to grow 0.1% in February.

Japan's economy grew an annualized 0.8% in July-September, the seventh straight quarter of growth. Growth has been slowing despite robust corporate capital spending on the back of firm exports, due to weak personal consumption.

But many economists expect the world's second-largest economy to have rebounded in October-December as consumption recovered largely in reaction to recent sluggishness. Fourth-quarter GDP data is out on Feb. 15.

Takeshi Minami, chief economist at Norinchukin Research Institute, said he expects private consumption to show a rise of 0.6-0.7% in October-December GDP from the previous quarter, compared with a 0.9% fall in July-September. He said: "Weakness remains in consumption, so it's hard to say consumption continues to recover."

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