TOKYO – Japan’s household spending rose the most since the summer of 2022 in a sign that consumer may be getting used to persistent inflation and could support for an economy that is taking a hit from US tariffs. 

Outlays by households adjusted for inflation gained 4.7 per cent from a year ago in May, largely due to more spending on cars, the Ministry of Internal Affairs and Communications reported on July 4. The result beat the median economist estimate of a 1.2 per cent gain.

The jump in cars this year helped inflate the overall number but was largely due to comparison with low volumes last year resulting from a safety certification scandal, according to an Internal Affairs Ministry official. Still, spending also grew for tourism both within and outside Japan while people also increased outlays on eating out.

Consumption makes up more than half of Japan’s economic output and could determine whether the economy will enter or avoid a technical recession. US tariffs including a 25 per cent levy on cars and car parts are weighing on Japan’s exports, raising the risk that the economy may shrink again in the second quarter after contracting in the first three months of the year.

“The results are relatively good. But we need to take into account that the data tend to be volatile,” said Ms Harumi Taguchi, principal economist at S&P Global Market Intelligence. “Temporary factors such as cars and travel pushed up the numbers, but it’s unclear whether this indicates sustained strong consumption.”

Around 64 per cent of economists polled in early June see the tariffs potentially causing a recession in the world’s fourth-largest economy.

So far Japanese carmakers have refrained from hiking prices in the US too much despite facing harsh tariffs, largely absorbing the costs and taking a hit to profits. 

Inflation in Japan remains persistently above the central bank’s 2 per cent target. Nominal wages have been on the rise, but real wages adjusted for inflation have fallen for four months nonstop through April, meaning that a rise in paychecks has yet to offset the pain of inflation. May wage data are due on Monday.

Ahead of an upper house election on July 20, Prime Minister Shigeru Ishiba is proposing fresh cash handouts to help households deal with inflation. Some opposition parties are pitching a sales tax cut as an alternative to ease the pain.

Unlike in the US, where President Donald Trump openly pressures the Federal Reserve on the course of monetary policy, the Bank of Japan appears to be facing little political pressure over bringing down inflation. 

“Inflation continues to hold down consumption,” said Ms Taguchi. “Wages are rising, but real wages keep falling, so I do not expect consumption to strengthen. In addition, the outcome of trade negotiations with Trump will affect economic sentiment.” BLOOMBERG

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