Japan’s Real Households Spending Declines for Four Consecutive Months, Highlighting BOJ’s Rate Hike Dilemma

By TrendForce

2025-01-10

Japan November Real average household consumption for two-or-more-person households decreased by 0.4% year-on-year (previous -1.3%), marking the fourth consecutive monthly decline, according to Japan’s Ministry of Internal Affairs and Communications on January 10.

The Bank of Japan (BOJ) officially ended its negative interest rate policy in March last year, citing the emergence of a virtuous cycle between wage growth and price increases. However, amid a weakening yen and rising inflation driven by the removal of energy subsidies, consumers are still compressing their spending under cost pressures, preventing a significant recovery in consumption expenditure.

While November wage data showed nominal wages rising by 3.0% year-on-year, up 0.8 percentage points from the previous month and marking the largest increase in over 30 years, inflation continued to outpace wage growth. Real wages declined by 0.3% year-on-year (previous -0.4%), also marking the fourth consecutive monthly decrease.

Bank of Japan (BOJ) Governor Kazuo Ueda stated at the December post-meeting press conference that the timing of the next rate hike would depend on the results of the preliminary shunto wage negotiations in March-April and changes in U.S. economic policies. This statement was interpreted by markets as an indication that the BOJ is likely to delay its next rate hike until March.

However, the BOJ’s quarterly report released on January 9 highlighted that labor shortages and minimum wage increases are progressively spreading the importance of wage growth across businesses of all sizes and industries. This suggests that the BOJ may already see sustained wage growth potential ahead of March.

Overall, The BOJ faces a difficult choice: raising rates earlier could help temper inflation and guide it toward moderate growth, but with wage increases still uncertain, it risks further pressuring already weak consumption.

On the other hand, delaying rate hikes could allow inflation to rise further, eroding consumers’ wage gains and real purchasing power. These conflicting factors create significant uncertainty over whether the BOJ will opt for a rate hike in January or March.

Fed FOMC Minutes: Uncertainty Around Trump’s Policies Increases Inflationary Risks

The Federal Reserve released the minutes from its December FOMC meeting on January 8. The key highlights are as follows: Inflation May Take Longer to Decline Fed officials noted that the growth rate of core goods and non-housing services inflation has begun to stabilize. While housing services prices remain elevated, they are expected to decline as growth in new lease rents continues to slow, eventually pulling housing inflation downward. Regarding the inflation outlook, officials generally expect inflation to continue moving toward the 2% target. However, they highlighted that higher-than-expected recent inflation readings, along with potential changes in trade and immigration policies, could prolong the disinflation process. Given the significant uncertainty surrounding the scope, timing, and economic effects of potential changes in trade and immigration policies, some officials have incorporated certain policy assumptions into their inflation projections. Labor Market Remains Stable Fed officials broadly agreed that the labor market remains steady. Indicators such as job openings, quit rates, the pace at which unemployed individuals find jobs, and reduced labor turnover reflect a gradual softening in labor demand by businesses. However, low layoff rates indicate that the labor market has not shown signs of rapid deterioration. Looking ahead, most officials anticipate the labor market will remain stable, though some highlighted significant uncertainty regarding its outlook. A few officials noted the potential for further weakening, as recent employment growth may fall below the level needed to maintain the current unemployment rate. Cautious Approach to Monetary Policy Adjustments Officials indicated that the Federal Reserve is at or near a stage where it should slow the pace of monetary easing, given that interest rates have already been reduced by 100 basis points (bps) and are closer to neutral rates than in September. Factors such as elevated inflation, robust consumer spending, reduced downside risks in the labor market, and heightened upside risks to inflation suggest that future monetary policy adjustments should be approached with greater caution. balance sheet reduction According to the Fed's survey, market expectations for the end of balance sheet reduction have been pushed further out, with most participants now anticipating the process to conclude in June 2025 (compared to the previous projection of Q1 2025). Summary As President-elect Trump prepares to reenter the White House, Fed officials anticipate increased inflationary risks due to potential changes in trade and immigration policies. They also expect inflation to take longer to decline than previously projected. Consequently, the Fed is likely to adopt a more cautious approach to monetary policy adjustments in the coming quarters. Following the release of the minutes, FedWatch data indicated that markets maintain a 95% probability that the Fed will keep rates unchanged in January, with the expected rate cut for the year narrowing to 25 bps.

2025-01-13

Key Focus This Week: U.S. CPI & China GDP

Stronger-than-expected U.S. employment data last week prompted markets to scale back expectations for Federal Reserve rate cuts, placing pressure on rate-sensitive financial and technology stocks. This weighed on the S&P 500, which declined 1.54% to close at 5,827.03. In the bond market, robust employment data pushed the 10-year U.S. Treasury yield up by 16 basis points to approximately 4.76%. Meanwhile, the U.S. Dollar Index jumped to around 109.6, edging closer to the 110 threshold. Key Economic Data for Last Week U.S. ISM Services PMI: The ISM Services PMI for December came in at 54.0 (prior: 52.1), marking six consecutive months of expansion. Sub-indices showed improvement, with the business activity index rising to 58.2 (prior: 53.7) and the new orders index increasing to 54.2 (prior: 53.7), reflecting resilient demand and early release of orders driven by uncertainty over Trump’s tariff policies. The employment index dipped slightly to 51.4 (prior: 51.5) but remained in expansion territory, indicating continued strength in the services labor market. However, robust demand pushed both input and sales prices higher, with the price index surging to 64.4 (prior: 58.2), suggesting that service sector inflation may take longer to ease. Read more at Datatrack U.S. Employment Situation: The December U.S. employment report significantly exceeded market expectations. Nonfarm payrolls rose by 256,000 (prior: 212,000), driven by employment gains in services sectors such as education and healthcare (+80,000), retail trade (+43,400), and leisure and hospitality (+43,000). Manufacturing, however, continued to decline, with a loss of 13,000 jobs. Household survey data showed a 478,000 increase in employed persons and a 235,000 decline in unemployed persons, pushing the unemployment rate down to 4.1% (prior: 4.2%). The labor force participation rate remained stable at 62.5%, and the share of unemployed workers who lost their jobs held steady at 47.2% (prior: 47.7%), highlighting the continued robustness of the labor market. Read more at Datatrack U.S. Fed December FOMC Meeting Minutes: The minutes shows that officials expect the labor market to remain strong. However, they indicated that potential changes in trade and immigration policies could heighten inflationary risks and delay the timeline for inflation to return to target. This outlook underscores the need for a more cautious approach to future monetary policy adjustments.   Key Economic Data for This Week U.S. December CPI (1/15): Supported by low base effects in Q4 and rising ISM services price indices in December, the Federal Reserve Bank of Cleveland forecasts U.S. December CPI to rise 2.86% year-on-year (previous 2.75%), with core CPI expected to grow 3.28% year-on-year (previous 3.32%). Read more at Datatrack   U.S. December Retail Sales (1/16): Driven by the traditional Q4 holiday shopping season and early demand release for durable goods, such as automobiles, due to uncertainty over Trump’s tariff policies, retail sales are expected to grow 3.7% year-on-year (previous 3.8%) and 0.6% month-on-month (previous 0.7%). Read more at Datatrack   China December Monthly Data (1/17): With the continuation of industrial equipment upgrade policies and consumer goods trade-in incentives, markets expect industrial output to grow by 5.4% year-on-year in December. Retail sales are forecast to increase by 3.5% year-on-year (previous 3.0%), supported by subsidies for automobiles and home appliances. Fixed-asset investment is expected to grow by 3.3% year-on-year amid weak local government fiscal. Meanwhile, Q4 GDP is projected to accelerate to 5.0% year-on-year (Q3: 4.6%), driven by stimulus policies and front-loaded exports due to Trump’s tariff measures, with full-year 2024 GDP expected to grow by 4.8% (2023: 5.2%). Read more at Datatrack

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