Japan Consumer Sentiment Falls First Time This Year

By Aki Ito

Dec. 11 (Bloomberg) -- Japan’s household sentiment fell in November for the first time this year, a sign pay cuts threaten consumer spending in the world’s second-largest economy.

The confidence index dropped to 39.5 from 40.5 in October, the Cabinet Office said today in Tokyo. The government lowered its assessment of sentiment for a second month, describing it as “weakening.”

Today’s report shows that the boosts of the former government’s emergency spending, which had lifted sentiment to a 23-month high in September, are waning as consumers become increasingly concerned about their shrinking paychecks. Prime Minister Yukio Hatoyama’s 7.2 trillion yen ($81 billion) stimulus package will do little to reverse that trend of falling wages, analysts say.

“There’s a lot of uncertainty among consumers right now, and the stimulus won’t do much to eliminate that sense of uncertainty,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “For the near term, we expect confidence to stagnate at a low level.”

Japan expanded an annual 1.3 percent in the third quarter, following growth of 2.7 percent in April through June, revised figures from the Cabinet Office showed this week. Consumer spending boosted the economy in both quarters as households took advantage of incentives to purchase energy-efficient goods.

The 7.2 trillion yen emergency package announced this week will extend incentives to purchase cars through September and household appliances through December next year.

Durable Goods

Willingness to buy durable goods, one of the four components that comprise today’s sentiment index, dropped the most since October 2008. Respondents’ sentiment toward their incomes declined for the first time since February.

Analysts say much of the uncertainty last month came from volatility in the markets. The yen strengthened against the dollar to 84.83 on Nov. 27, the highest level since 1995.

The Nikkei 225 Stock Average tumbled 6.9 percent in November, the steepest drop in 10 months, on concern a stronger yen will erode exporters’ profits and reduce the competitiveness of their products abroad.

Hatoyama today indicated he may abandon a pledge of capping bond sales at 44 trillion yen next year to “protect the lives of citizens.”

Losing Steam

In another sign that the recovery is losing steam, merchant sentiment last month dropped to the lowest level since March, when the economy was still in a recession, and industrial production gained at the slowest pace in eight months in October.

Wages slid for a 17th month. Employers will cut winter bonuses by 14.8 percent to a 20-year low, the steepest drop since the survey began in 1978, a Nikkei newspaper survey showed today. Firms typically pay the bonus, which is often equivalent to several months of pay, this month.

Companies are lowering prices to lure consumers, exacerbating deflation. Aeon Co., the nation’s largest supermarket retailer, will hold a five-day sale through Dec. 14 at its 23,000 outlets. The company will lower prices by 10 to 20 percent to match the amount this year’s bonuses are likely to drop, it said on its Web site.

Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo, says companies will keep slashing labor costs until the middle of next year, an indication paychecks won’t grow.

Even so, the jobless rate unexpectedly fell to 5.1 percent. The third monthly decline represents a “genuine” turnaround in the labor market, according to Julian Jessop, chief international economist at Capital Economics Ltd. in London.

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net