By Satoshi Sugiyama

Tokyo (Reuters)

Japanese household spending rose for the first time in five months in December year-on-year, increasing at a pace much faster than expected. The government, however, cautioned that it’s too early to declare an end to the downtrend in consumption.

According to data from the internal affairs ministry released on Friday, consumer expenditure climbed by 2.7% in December compared to the previous year, exceeding the median market forecast of 0.5%. This growth marks the fastest pace since August 2022.

On a month-on-month, seasonally adjusted basis, spending increased 2.3%, contrary to expectations of a 0.2% decline.

The rise in spending is attributed largely to one-off seasonal factors, such as equipment repairs, automobile purchases, and increased demand for winter apparel due to cold weather, stated an official from the internal affairs ministry.

Despite the positive figures, the official warned it’s premature to conclude that household spending is on the path to full recovery, as cost pressures continue to weigh on consumer purchasing power.

“There are still areas where people are spending less and being frugal, such as food and utilities,” the official remarked, suggesting caution in assessing the sustainability of this recovery.

Consumption and wage trends are critical for the Bank of Japan (BOJ) in gauging the economy’s strength and determining any need for additional rate hikes.

In household spending data for the entire year of 2024, spending declined 1.1% from the previous year, reflecting consumer restraint in light of rising prices.

In January, the BOJ raised interest rates to 0.50%, the highest in 17 years, expressing confidence that rising wages would maintain inflation around the 2% target.

Recent December wage data indicated inflation-adjusted wages increased 0.6% year-on-year due to winter bonuses, with government officials optimistic about increasing wage momentum.

Looking ahead, analysts remain skeptical about a strong recovery in personal consumption. Masato Koike, senior economist at Sompo Institute Plus, stated, “Although high wage increases are expected in this year’s pay negotiations, the recovery in real wages is anticipated to be limited due to rising food costs.”

Koike predicts real wages may enter positive territory in the second half of 2025, prompting a gradual recovery in consumer spending until then.