Japan – May consumer confidence

Consumer sentiment remains very weak. However, a turn up is starting to take shape, and that could gain real momentum if the April-May moderation in inflation expectations continues, and a further relaxation of covid restrictions encourages a more vigorous recovery in services activity.

In contrast to today's positive April labour market data, the consumer sentiment numbers for May were sluggish. There was broad-based improvement, but the scale of change was very mild. By historical standards, consumer confidence in Japan remains extremely weak.

Part of the reason is the high rate – by Japan standards – of CPI inflation, which has delivered a cost of living shock similar to that playing out in the other advanced economies. That inflation is problematic for consumer spending is suggested by the long-standing inverse relationship between overall confidence and price expectations in the consumer sentiment survey.

In this respect, it is good news for activity that today's consumer survey continued the trend that began in April, with a moderation in the pace of increase of inflation expectations. That makes some sense, given the easing of some import prices, and research from the BOJ indicating that inflation expectations in Japan are driven by the current rate at which prices are changing.

It could be that Japan is now setting up for quite a big improvement in consumer confidence. That's because inflation expectations would be falling at the same time as the government further relaxes covid restrictions, a change that might allow the post-covid bounce in services activity that has been seen elsewhere to finally occur in Japan.