How sustainable is Japan's surge in consumption?

In Tokyo, the prices of home durable goods rose in November for the first time in two decades, and at their fastest pace in 30 years. The data provide further bolstering to Abenomics - prime minister Shinzo Abe's answer to breathing life into an economy that's trying to overcome 15 years of deflation.

Prices of TV sets and fridges rose four per cent this month, compared to a year ago, with core consumer prices rising 0.9 per cent year-on-year in October.

(Capital Economics)

The preliminary estimate for private consumption in the last quarter saw a small 0.1 per cent increase, but followed a very strong first half, meaning that year-on-year, private consumption was still up 1.9 per cent. Japanese consumption has scaled new heights as a share of demand in recent years, despite the fact the share of income going to workers has fallen.

The main reason for the growing gap between consumption and labour income is an ageing population, where pensioners carry on consuming after retirement, says Marcel Thieliant of Capital Economics. Pension spending rose by around four per cent of GDP between 2000 and 2009, and has likely continued to increase since then, as population ageing has accelerated, he adds.

(Capital Economics)

A pick-up in wage growth in needed, argues Thieliant, as working households have started to save less and, although diminished savings can continue for a period, households will, invariably, want to maintain higher savings rates in order to fund retirement. Major businesses and labour lobbies are being pressured by the government to up wages before the raising of sales tax from five per cent to eight per cent this coming spring.

(Capital Economics)

But Thieliant says that it is the acute awareness within Japan of an ageing population and its effects (public pensions are paltry and may need to be slimmed further) which means that, unless wage growth really does pick up, the recent consumption surge is unlikely to last for very long.

A key release for Japan, due on Monday, is its finance ministry's corporate statistics survey. Machinery orders point to a steady rise in business investment in the third quarter, which may, in turn, say Capital Economics, lead to an upward revision in the second estimate of third quarter GDP, also out next week.