Confidence in Abenomics hit as Japanese retail trade drops sharply

Source: Capital Economics

Japanese retail trade contracted by more than expected in July, according to official figures from the Ministry of Economy, Trade and Industry.

Compared with July 2012, retail trade fell by 0.3 per cent, following 1.6 per cent annual growth the month before. Analysts had expected to see no movement at all.

Month-on-month, meanwhile, trade contracted by 1.8 per cent, following a 0.2 per cent fall the month before.

Source: Capital Economics

Marcel Thieliant, Japan economist at Capital Economics, said the fall “casts doubt on the ability of Abenomics to boost private consumption”. While hot weather may have negatively impacted spending, he said, falling household expenditure and declining confidence suggest that the weakness is “genuine”.

But perhaps the biggest threat to spending is inflation.

Admittedly, revised data for June labour cash earnings show that wage growth is keeping up with inflation. The revised figures show an increase in overall earnings of 0.6% y/y, higher than the initially reported 0.1%, and sufficiently strong to offset the 0.2% rise in consumer prices.

However, the increase was due to higher overtime and bonus payments. Regular earnings still fell by 0.6% y/y. Households are probably well aware that once the summer bonus season is over, wages will likely continue shrinking, depressing their purchasing power.