Japan Service Demand Falls, Reflecting Weak Spending

By Toru Fujioka and Keiko Ujikane

Aug. 14 (Bloomberg) -- Japan's demand for services fell the most in four months in June as higher energy and food costs discouraged spending in the world's second-largest economy.

The tertiary index, a gauge of money households and businesses spend on phone calls, power and transportation, decreased 0.8 percent from May, the Trade Ministry said today in Tokyo. The median estimate of 33 economists surveyed by Bloomberg News was for a 0.3 percent drop.

A drop in spending by consumers, whose sentiment is at the lowest level in at least 26 years, contributed to the economy's contraction last quarter. Economists say that Japan may slip into its first recession since 2001 this year as households cut back just as a weakening global economy hurts exporters.

``It's becoming more apparent that price increases are making consumers spend less,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``Consumer spending will probably stay weak in the months ahead. Chances for a recession are increasing.''

Gross domestic product contracted an annualized 2.4 percent last quarter, the Cabinet Office said yesterday. The government last week described the economy as ``weakening,'' language it hadn't used in seven years.

``Rising prices for daily necessities are stopping consumers from spending,'' Tadashi Okamura, chairman of the Japanese Chamber of Commerce, said yesterday.

Cutting Spending

The price of frequently purchased goods rose 4.2 percent in June, when wages dropped for the first time this year. Households cut spending for a fourth month after the jobless rate rose to the highest since September 2006.

``Demand for services is weakening because of rising food and gasoline prices,'' said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. ``We can't count on consumer spending to help the waning economy.''

Sluggish consumer spending and higher prices are prompting some companies to reconsider plans for expansion.

Morinaga & Co., a Tokyo-based confectioner, postponed this year's construction of a plant in Gunma Prefecture because of rising oil prices and weak consumer spending, according to Rika Baba, a company spokeswoman. Profits fell 67.2 percent in the three months ended in June, the company reported this month.

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