Japan sees surprise rise in household spending boosting interest rate hike potential

In Japan, household spending data from December 2024 reveals a significant increase of 2.7% year on year in real terms. This rise marks a noteworthy recovery, as it is the first increase since July 2024 and sharply exceeds economists' predictions of a mere 0.2% increase. The average household expenditure hit 352,633 yen ($2,332), reflecting a 7% gain in nominal terms compared to the previous year. This growth in spending is accompanied by an increase in average monthly household income, which rose by 7.2% in nominal terms, coming in at 1,179,259 yen. These developments are likely to influence the Bank of Japan's (BOJ) policy on interest rates as the organization has stated its intention to raise rates if a sustainable economic cycle of increasing prices coincides with growing wages. Following the announcement of household spending, the Nikkei 225 index showed a decline of 0.44%, while the yen valued at 151.19 against the dollar. Financial analysts are closely monitoring upcoming decisions by the BOJ, especially considering the current expectations of a 95.7% probability of maintaining current rates at the next meeting set for March 19, 2025, with a 21.2% chance of increasing rates in May. Another factor in this situation is the impending 'shunto' wage negotiations, slated to begin in February 2025. The head of the Japanese Trade Union Confederation, Tomoko Yoshino, has emphasized that wage growth must surpass the previous year's 5.1% increase to counteract declining real wages. This focus on wage negotiations stems from a concerning trend, as real wages in Japan have experienced a decline for three consecutive years, including a 0.2% drop year on year in 2024. The union has formally requested a wage increase of at least 5% for this year's negotiations, with additional emphasis that workers in smaller firms should see increases of at least 6%. This context is crucial for understanding the pressures on the BOJ and the broader Japanese economy as these discussions unfold in mid-March. Overall, these economic indicators signal a turning point for Japan’s economic recovery from previous downturns, as stronger household spending and wage pressure may drive the BOJ's tightening of monetary policy. Investors and economists alike will be watching these developments closely, particularly how they impact the upcoming wage negotiations and interest rate decisions in the near future.