Japan Household Spending Surges Past Forecasts: Can Consumer Strength Lift Economy?

TradingKey - Newly released May data on Japanese household spending far exceeded market expectations. Adjusted for inflation, real household consumption expenditure surged 4.7% year-over-year in May, significantly higher than the projected 1.2%, marking the largest year-over-year increase since August 2022. Seasonally adjusted, the monthly-on-month growth reached 4.6%, the strongest performance since March 2021.

Automotive spending soared 28.3% year-over-year, primarily driven by a low base effect from the 2024 safety certification scandal, and restored auto production capacity in 2025, which boosted sales. Service consumption emerged as another key driver, with domestic and international travel expenditure rising 12.8% year-over-year and dining-out spending increasing 6.5%.

Strong consumer data can be attributed to the following key reasons:

Income Improvement Signals: Despite actual wages declining for four consecutive months (as of April), the growth in nominal wages and agreements reached during the spring labor negotiations, which averaged over 5% increases, have boosted consumer confidence.

Policy Stimulus Effects: The Japanese government's inflation subsidy policy and commitments to cash assistance before the Senate elections have partially alleviated household spending pressures.

Inflation Transmission Impact: In May, core CPI rose 3.7% year-over-year, and high inflation may force households to make purchases sooner to avoid further price increases in the future.

Consumption accounts for over 50% of Japan's economic output and serves as a key indicator of economic vitality. After Japan's economy contracted in Q1 2025, the recent rebound in consumption may inject new confidence into Japan's economic recovery.

However, some economists question the sustainability of this consumer rebound. They argue that the growth in automobile and tourism spending is temporary while declining real wages and inflationary pressures (with food prices expected to rise by 15% in July) could dampen long-term consumer momentum.