May 29,2014,12.00 JST

Consumer behavior in 2014 virtually the same as in 1997

It seems consumers' behavior before and after the VAT hike is virtually the same in 2014 as in 1997. In April 2014, retail sales fell by 4.4% year on year (YoY), comparable to the decline of 3.8% YoY in April 1997.

The behavior of sub-sectors is mostly similar. Department store sales fell by 10.6% YoY in April 2014 (-11.2% in April 1997), motor vehicle sales fell by 10.2% YoY in April 2014 (-11.6% YoY in April 1997). Supermarket sales behaved slightly differently. In April 2014, it fell by 3.9% YoY although in April 1997 it managed to expand by 0.8% YoY. The difference is probably due to the fact that supermarket store chains were still expanding in 1997, while the market is by now saturated and the number of supermarkets stores is not rising much. When we exclude the new store factors, the YoY change of supermarket store sales is more comparable, down 5.1% YoY in April 2014 versus down 3.9% YoY in April 1997.

The big question is if the rest of 2014 would be also similar to 1997. While Japanese policy makers tend to maintain that the initial shock of VAT hike would diminish by summer and thus 2014 will be different from 1997. We think they are being overly optimistic. For the whole of 2014, Japanese household will suffer negative income growth. Wages is starting to rise, but the wage growth in 2014 will still be sizably lower than the rate of inflation. We forecast the wage growth in 2014 to be 1.2%, significantly lower than 2.7% forecast for the CPI inflation.

Non-wage earning households will not be faring better. The public pension, an increasingly important source of income for Japanese household nowadays, is being cut by 0.7% from April 2014, a particularly bad timing for pensioners. Retirees over the age of 65 now accounts for 25% of the whole population. Japanese population also knows that there will be another installment of the consumption tax rate hike in October 2015. Financial market are not helping much either. Japanese stocks are down 10% since the beginning of the year. In this light, it is difficult to see how Japanese consumers could keep spending after the VAT hike.

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.

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