Japan Household Spending Plunges 6.8% in September as BOJ Members Signal Faster Rate Hikes

Japan's household spending fell 6.8% in September from a year earlier, far exceeding the median forecast of a 3.0% to 3.8% decline and nearly double the 3.1% drop recorded in August. On a seasonally adjusted month-on-month basis, spending fell 2.8%, the first monthly decline in three months, against a forecast of flat to slightly positive. The September result marks the tenth consecutive year-on-year decline in household spending, underscoring persistent weakness in Japanese consumption.

The drag on private consumption is expected to show up clearly in the third-quarter GDP report due November 16. Japan's Q3 consumption trend index fell 3.1% quarter-on-quarter in real seasonally adjusted terms, reversing a 0.6% gain in Q2, signaling that weak household demand will weigh on the headline growth figure.

Despite the consumption weakness, the Bank of Japan's summary of opinions from its October policy meeting revealed that most board members lean toward raising rates in the near term. One member stated that underlying inflation has reached 2% and that the BOJ must raise the policy rate to a neutral level soon. Another said Japan is entering a new phase requiring faster rate hikes toward neutral and that moving early would allow flexibility for both future hikes and cuts. A third member said the bank should raise rates when feasible without excessive caution, while another noted that the next rate increase is unlikely to significantly hurt the economy on a net basis and that Japan's neutral rate is likely considerably above 1%. A dissenting voice urged careful monitoring of economic and price conditions and said maintaining current policy a bit longer was appropriate to assess risks, with another cautioning that a rate hike could weigh on the economy and push down inflation.

Bloomberg's top-ranked dollar-yen forecaster Neil Parker said he expects the yen to rally toward 147 per dollar next year as Japan's interest-rate differential with the United States narrows. Forecasters also expect a large gain in Japan's producer price index later in the week, citing rising commodity and energy prices.