Private Consumption Weakening Is Starting to Act as a Major Drag on Prices

The Bank of Japan (BoJ) continues to adhere to its stance that private consumption has exhibited a steadfast, moderate pace of growth, even in the face of challenges posed by ascending price levels. The BoJ anticipates that while there may be an impact on private consumption due to these price increases, the trajectory is projected to persist in a moderately increasing fashion in the immediate future. This confidence in the resilience of consumption is underpinned by several factors, including the expected realization of pent-up demand and the support derived from household savings accumulated during the restrictive phases of the pandemic. Moreover, an improvement in consumer sentiment, primarily propelled by a rise in wage growth, is considered a reinforcing element.

The BoJ's consumption data, which reveals a 0.4% quarter-on-quarter growth in real consumption in Q323 following a -1.0% contraction in Q2, lends support to this optimistic outlook. However, a deeper analysis of the Q323 GDP data discloses a more nuanced picture—real private consumption, included therein, appears to have entered a phase of stagnation, registering a marginal growth of -0.0% quarter-on-quarter (-0.2% quarter-on-quarter annualized). This marks the second consecutive quarter of decline, introducing an element of caution into the evaluation of consumption trends.

It is noteworthy that the BoJ's consumption data excludes the demand emanating from inbound tourists, typically classified as exports. In Q323, inbound tourist consumption, considering the rebound in tourism and the weakened Japanese yen, demonstrated a modest -0.2% quarter-on-quarter growth. This prompts a critical consideration: the BoJ's data might potentially underestimate the substantial impact of inbound demand on the overall consumption landscape. The actuality could be that inbound tourist consumption exerts a more robust influence than the data indicates, implying a potential scenario where real consumption is weaker than the BoJ's presented narrative.

Delving further into the implications, if the BoJ's consumption data indeed proves to be overly optimistic about the resilience of domestic private consumption, it raises the spectre that households are already responding to the inflationary pressures by curbing their consumption. In such a scenario, the heightened risk emerges that businesses might undertake measures to cut prices, potentially precipitating a more pronounced impact on inflation than initially envisaged by the central bank.

In the context of persistent inflation, the ramifications extend to real wages, which have borne the brunt of these economic dynamics, contributing to a deterioration in household fundamentals. As households contend with the challenge of tolerating further price increases, a discernible decline in demand becomes a foreseeable consequence. This, in turn, positions businesses strategically, as they may seize the opportunity to expand significantly by leveraging the potential for increased consumer activity resulting from judiciously implemented price cuts.

In summation, the BoJ remains resolute in its assessment, portraying private consumption as following a moderate and unwavering growth trajectory despite the impediments posed by escalating prices. However, a closer examination of the data raises legitimate concerns about potential underestimations, particularly in relation to inbound tourism impact, potentially signalling a delicate equilibrium between consumption resilience and the latent risk of a more pronounced downturn. This intricate economic landscape underscores the complexity of predicting and managing the nuanced interplay between consumption patterns, inflationary pressures, and business responses in the ongoing economic landscape.

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