TOKYO -- The typhoons and downpours that battered cities across Japan in July have also cast a pall over consumer sentiment, threatening to derail an economy beginning to emerge from the decline caused by the April consumption tax hike.
Household consumption declined while retailers' sales grew in July, a gap attributed to a slump in spending in sectors affected by the weather, including restaurants.
According to the Internal Affairs Ministry's household survey for July, consumption declined 5.9% on the year in real terms. Households spent 5.5% less to eat out and 10.2% less for recreation services, including domestic leisure travel. And spending on household durable goods plunged 27.2%, with the drop especially drastic for room air conditioners.
Meanwhile, retailers' sales grew 0.5% in nominal terms in July, the first increase since the tax hike, in the Ministry of Economy, Trade and Industry's commerce report. Although this includes the effect of the consumption tax hike from 5% to 8%, spending has been recovering for personal items not affected by the weather.
However, Daiwa Institute of Research Chief Economist Mitsumaru Kumagai argues that consumption is weak even if the effects of the weather are excluded. Household consumption would have fallen more than the 3% dip in June even if spending on restaurants and recreation services had been flat.
Rising prices are hurting consumers. The consumer price index, excluding perishables, climbed 3.3% on the year in July, outpacing the increase in wages.
The recovery in production has also been slow. The industrial production index edged up 0.2% on the month in July, the first increase in two months. But the improvement is paltry considering that the figure had dived 3.4% in June. An earlier forecast in July called for a 2.5% gain for the month, but the actual figure fell short partly because automakers reduced output to adjust inventories.
Japanese companies, mainly large corporations, anticipate a 1.3% increase in production in August and a 3.5% rise in September. Despite these optimistic predictions, actual output has been consistently short of forecasts since the tax hike.
There are, however, some positive signs. Industrial shipments rose 0.7% in July, the first gain in six months. Production is seen growing more than 5% in September for key products, including electronic parts and transport machinery. Shipments of capital goods excluding transport machinery -- a leading indicator for capital investment -- rose 5.5% in July. A recovery in capital investment would lead to economic improvement even if consumption is lackluster.
A final decision on whether to raise the consumption tax in October 2015 will depend largely on gross domestic product for the July-September quarter, which is due out on Nov. 17. With severe weather continuing in some part of western Japan this month, the strength of the economy is being tested.