April 28,2014,10.00 JST

A replay of 1997?

It seems consumers' behavior in the run up to the VAT hike in 2014 was almost the same as what happened in 1997. In March 2014, retail sales rose by 11.0% year on year (YoY), comparable to the rise of 12.4% YoY in March 1997. The behaviors of sub-sectors are also comparable. Department store sales rose by 25.0% YoY in March 2014 (+22.8% in March 1997) and supermarket store sales rose by 12.6% (+12.4% YoY in March 1997). 

Chart: Consumer behavior the same in 2014 as in 1997


Source: METI, JMA

The big question is what would happen to the consumption trend after April. We are not optimistic. For the whole of 2014, Japanese household will suffer negative income growth. Wages is starting to rise, but the pace of their increase will certainly lag behind the inflation. We forecast the wage growth in 2014 to be 1.0%, significantly lower than 2.7% forecast for the CPI inflation.    

Non-wage households will not be faring better. The public pension, the other important income for Japanese household nowadays, is being cut by 0.7% from April 2014, a particularly bad timing for pensioners. Japanese household also knows that there will be another installment of the consumption tax rate hike in October 2015. In this light, it is difficult to see how Japanese consumers could keep spending after April.

When we compare wage growth trend between 1997 and 2014, we notice that wage earners are in much worse position to absorb the VAT hike in 2014.    

 source: MHLW, JMA 

Policy makers could intervene. In fact, we thought BoJ governor Kuroda would be forward-looking enough to implement another monetary stimulus by now to boost consumer sentiments. It seems he has decided to wait until bad news actually hit Japan. By then, it may be too late to stop the waning economic momentum.