Japan Merchant Sentiment Falls as Inflation Weighs on Consumers

By Toru Fujioka

July 8 (Bloomberg) -- Sentiment among Japanese merchants fell to a six-year low in June as higher food and oil prices discouraged consumers from spending.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, dropped to 29.5 from 32.1 in May, the Cabinet Office said today in Tokyo. An index of conditions in two to three months slid to 32.1, the worst since September 2001, from 35.1.

More than half of the nation's consumers plan to pare spending this year because of rising prices, a central bank survey showed last week. The Bank of Japan lowered its assessment of consumption, which makes up more than half of the economy, in all nine areas of the country in a quarterly report yesterday because of higher costs.

``Rising prices of daily necessities are a strong headwind for consumers,'' said Yoshiki Shinke, a senior economist at Dai- Ichi Life Research Institute in Tokyo. ``Consumer spending might not be able to keep supporting the economy and that's bad because foreign demand is also weakening.''

A record 88.9 percent of people expect prices to climb in the next 12 months and an unprecedented 58.7 percent said they will cut spending, last week's Bank of Japan survey showed.

Wages rose 0.2 percent in May, the slowest pace this year, while the prices of frequently purchased goods grew 2.4 percent. Consumer sentiment is at a six-year low and people are cutting back on non-essential spending to make up for higher costs.

JTB Corp., a travel agency, said summer travel will probably fall at the fastest pace in 15 years this season.

``Travelers are being very cautious about spending given rising oil prices and the uncertain outlook for the economy,'' said Yasoji Kato, spokesman at JTB. Some 25 percent of people planning trips are still undecided on their destination, an ``unusually'' high proportion, he said, because higher energy prices are limiting their options.

Hiromichi Shimizu, a taxi driver, has decided to scale down his summer trip with wife and four children.

``I gave up traveling far away and staying at a hotel because of the crazy gasoline prices,'' Shimizu, 32, said. ``We're going camping somewhere close this year to save money.''

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net