Japan Service Demand Falls as Consumers Pare Spending

By Toru Fujioka

July 16 (Bloomberg) -- Japan's demand for services fell in May as increases in prices for food and energy outstripped wage growth, forcing consumers to cut back.

The tertiary index, a gauge of money households and businesses spend on phone calls, power and transportation, decreased 0.2 percent from April, the Trade Ministry said today in Tokyo. The median estimate of 36 economists surveyed by Bloomberg News was for a 0.2 percent gain.

Personal spending, which accounts for more than half of the economy, is weakening as a stalling job market and surging inflation discourage consumers. Households are the most pessimistic they've been in at least 26 years, a report last week showed.

``Demand for services is weakening against the backdrop of stalled wage growth and rising costs,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``There's a higher chance that consumer spending will start to decline.''

Prices of frequently purchased goods from milk to eggs climbed 2.4 percent in May, 10 times more than the pace of wage growth in the month. The ratio of job vacancies per applicant is the lowest since February 2005.

Aeon Co., Japan's largest supermarket operator, said its net income dropped by 20 percent in the three months ended in May because of weak clothing sales.

`Unnecessary Spending'

``We can see that consumers are trying to cut unnecessary spending because of a tougher labor environment and sluggish wage growth,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo. ``Demand for services will remain weak as households become increasingly conservative about spending and rising prices reduce their real income.''

Corporate demand was also a drag on the index as higher prices crimped profits and left firms with less to spend. Civil engineering and architectural services fell in May, according to Katsuya Shimura, a spokesman at the trade ministry.

Gasoline price at a record 181.5 a liter ($6.54 a gallon) may also be affecting households' travel plans. JTB Corp., a travel agency, said summer travel will probably fall at the fastest pace in 15 years this season.

Some 25 percent of people planning trips are still undecided on their destination, an ``unusually'' high proportion because higher energy prices are limiting their options, according to Yasoji Kato, a spokesman at JTB.

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