Japan's sluggish consumer spending growth adds challenges to BOJ's rate hike plan

Household spending in Japan rose less than expected in July, with consumers still showing wariness in opening wallets amid high prices, a factor that could further complicate the central bank's plans for more rate hikes over the coming months.

Consumer spending inched up 0.1 per cent in July from a year earlier, against the median market forecast for 1.2 per cent growth, government data showed on Friday. On a seasonally adjusted, month-on-month basis, spending fell 1.7 per cent versus an estimated 0.2 per cent drop.

"There is a very good chance that consumer spending will be negative again in the next month," said Takeshi Minami, chief economist at Norinchukin Research Institute, adding that households appear to be sceptical about whether wage gains will continue next year.

Data a day earlier showed Japan's inflation-adjusted wages grew for a second straight month in July, propelled by a bump in summertime bonuses. Base pay, or regular pay, rose at the quickest pace in nearly 32 years, reflecting the outcome of this spring's labour-management wage talks.

However, the government said the big test would be whether real wages continue rising in August and beyond without the seasonal factor of summer bonuses.

Consumers spent more on television and travelling but cut back on food and utility expenses due to higher prices in July, an internal affairs ministry official said, adding they also put their income into savings.

Private consumption, accounting for over half of the economic output, had become a weak link in the Japanese economy over the last year or so. But it marked the first gain in five quarters in the April-to-June period, stirring hopes that a consumer-led recovery might be in store.

Strong consumption, added to solid wages and durable inflation, are the chief reasons the Bank of Japan says are indispensable in deciding on further rises in interest rates.

With a view that the economy was making progress toward durably achieving its 2 per cent inflation target, the BOJ jettisoned negative interest rates in March and raised short-term rates to 0.25 per cent in July.

The BOJ needs to confirm through relevant data before raising borrowing costs again, Minami said, adding the July rate hike was carried out without looking at the recovery of consumption.

The Japanese government last month upgraded its economic assessment for the first time in more than a year on signs of improving personal spending.