Japan spending falls but tight jobs market offers hope of end to deflation

Japan's household spending unexpectedly fell in July though the labour market continued to strengthen, offering some hope wage gains will soon accelerate and help the world's third-biggest economy overcome a decades-long battle with deflation. Many analysts expect the economy to extend its recovery at a healthy clip, with job availability at a fresh 43-1/2-year high in July and improving business confidence set to underpin corporate spending.
But firms face a dilemma even as the economy is on course for its second longest postwar expansion - rising labour costs that cut into their bottom line and pressure to attract price-sensitive shoppers with discounts. "We'll probably see a gap between companies that have the capacity and pricing power to raise prices and those that don't," said Mari Iwashita, chief market economist at SMBC Friend Securities.
"It's not back to days of deflation when you win just by cutting prices. That's good for the economy. But it means companies are faced with a more complex business environment." Household spending slid 0.2 percent in July from a year earlier after hitting a two-year high in June, government data showed on Tuesday, confounding a median market forecast for a 0.7 percent increase.
The jobless rate was flat at 2.8 percent in July and 1.52 jobs were available per applicant, the highest since 1974, separate data showed, a sign the economy continued to enjoy what many analysts consider as near full employment. "We are not too worried about the slowdown in household spending in July as strong job growth continues to support household incomes," said Marcel Thieliant, senior Japan economist at Capital Economics. Still, consumption is likely to shave off economic growth in July-September after making a net contribution in the second quarter, as rainy weather kept shoppers home in August, analysts say.
That leaves the economy's recovery at a testing point with escalating tensions in North Korea and uncertainty over US President Donald Trump's economic policies raising risks for global growth. Japan's economy expanded at the fastest pace in more than two years in the second quarter as consumer and company spending picked up.