Private consumption slumping due to consumption tax hike; to recover as employment and wages improve

Real private consumption plunged in Apr-Jun, by an annualized -19.0% QoQ. The figure appears to reflect a reactionary drop in the surge of demand ahead of the consumption tax hike as well as weaker real purchasing power because of the tax hike. The private consumption recovery has been weaker recently because of adverse climate conditions over the summer, but is likely to persist because of improving employment and wage conditions. With employee numbers picking up, scheduled wages rose even more in July and bonuses and other special wage also jumped (Figure 9). As a result of the spring wage negotiations, wages (including annual wage hikes and higher basic wage) rose 2.07% this year, a 0.36%pt increase from 2013. As a result, one-time payments totaled approximately JPY1.54 million, a 6% increase from 2013. Macro-level real wages also appear to reflect this. Employment has been expanding and wages rising because of companies' greater willingness to hire, and household incomes are thus expected to keep going up. This is expected to support a private consumption recovery (Figure 10).

Residential investment slump in reaction to the surge of demand ahead of consumption tax hike

Real residential investment plummeted an annualized -35.6% QoQ in Apr-Jun, the first drop in nine quarters. New housing starts, a leading indicator of residential investment, have been declining after peaking at end-2013, especially for owned housing and build for housing sale, and residential investment, calculated in terms of investments made, also started to fall (Figure 11). Residential investment is expected to continue to drop for some time in reaction to the surge of demand ahead of the consumption tax hike, while a slowing household formation rate is also forecasted to exert downward pressure over the medium to long term. However, we expect the surge of demand ahead of the next consumption tax hike (expected in October 2015) to lift residential investment temporarily (Figure 12).