Japan's private consumption to remain sluggish

The rebound in retail sales in April did not reverse the plunge in March, and we think that consumer spending will remain sluggish in coming months.

The 0.4% m/m rise in retail sales values last month was not strong enough to reverse March's outsized 1.9% m/m fall. Admittedly, sales jumped by 5.0% in y/y-terms after plummeting by 9.7% y/y in the previous month, notes Capital Economics. But this reflects the impact of last year's sales tax hike rather than any sudden surge in spending this year.

In any case, retail sales are not the best indicator of consumer spending in Japan. Despite a 2% q/q plunge in real retail sales last quarter, private consumption still rose by 0.4% q/q according to the preliminary estimate. Analysts will therefore pay more attention to aggregate household spending data, due for release tomorrow. Following a surge in "core" spending in March, a renewed drop in April is expected.

There are good reasons to be concerned about the outlook for consumer spending. For a start, households have decided to save rather than spend the windfall from lower energy prices. The latest consumer confidence survey showed that consumers expect income growth to remain weak, so they will start spending more forcefully anytime soon is on doubt.

Indeed, this year's spring wage negotiations, which are nearing their end, suggest that households' concerns are justified. While firms intend to hike base pay by more than a year ago, they intend to lift bonus payments by less. Overall wage growth should therefore remain sluggish in coming months, constraining the recovery in private consumption.