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Trends in Consumer Spending by Household Type
-Spending by middle and low income working households
shows the beginnings of a recovery-

October 21, 2005


This article describes the background reasons for the current buoyancy of consumer spending, by type of household, and attempts to assess its sustainability.

A review of trends in consumer spending in recent years reveals that, since the end of the 1990s, consumption by retired households has generally held firm while consumption by working households has stagnated, especially in the middle and low income bands. However, in the course of the economic recovery that began in 2004, the pattern has reversed itself.

Among working households in the middle and low income bands, improving employment and income conditions have contributed to a recovery of consumption. Consumer confidence has also held firm and the propensity to purchase of households, which for some years have been cutting back on unnecessary and non-urgent spending, is finally beginning to recover, with the emergence of pent-up demand for consumer durables.

By contrast, spending by retired households and working households in the higher income bands has been losing momentum in recent months. This is due partly to the fact that, because these households have substantial assets, the deflation of the second half of the 1990s augmented their effective purchasing power (the Pigoux effect) and that, as deflation has slowed in recent months, this effect has diminished, and partly to the fact that, as purchasing of consumer durables began to increase earlier among such households than it did among working households in the middle and low income bands, recent months have seen the start of a backswing.

Looking to the future, spending by both working households and retired households is likely to hold steady but is unlikely to see any further acceleration. Although a continued gentle improvement in employment and income conditions and the wealth effect can be expected, the scheduled increases in the burden on households, the tailing-off of the Pigoux effect and other negative factors mean that consumption is likely to show limited buoyancy.

If consumption is to remain on a firm footing in the future, the fact that the deterioration of business profits is tending to impact on employee incomes by reducing the size of bonus payments makes it essential that corporate profitability, which is the basis for growth of employee incomes and the growth of asset values, should be enhanced. Steps should also be taken, without delay, to rebuild the social security system in a sustainable form, with a view to ensuring peace of mind for the people of Japan.

For more information on the content of this report, please contact: Naoko Ogata the Japan Research Institute, Limited.

Tel: 03-3288-5120

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