Japanese retail sales posted their 16th straight year-over-year increase in June, thanks to strong demand for automobiles amid improving supply chains, recovering department stores and higher prices for food and beverages, mitigating the impact of falling fuel costs and sluggish appliances sales, data released Monday by the Ministry of Economy, Trade and Industry showed.

The Econoday Consensus Divergence Index stood at minus 18, below zero, which indicates the Japanese economy is performing worse than expected. Excluding the impact of inflation, the index was at minus 19.

Japanese policymakers believe the economy still needs continued monetary and fiscal policy support to achieve sustainable wage growth and stable 2 percent inflation, pointing that the output gap remains in negative territory, although it has narrowed recently.

Retail sales rose a preliminary 5.9 percent on the year in June for the 16th straight year-over-year rise after rising 5.8 percent (revised up from a 5.7 percent rise) in May, 5.1 percent in April, 6.9 percent in March and 7.3 percent in February. The increase was higher than the median economist forecast of a 5.5 percent rise (forecasts ranged from 4.2 percent to 7.0 percent gains). The 7.3 percent rise in February remains the fastest since the 8.3 percent increase in May 2021.

On the month, retail sales fell 0.4 percent on a seasonally adjusted basis in June for the first drop in two months following a 1.4 percent (revised from 1.3 percent) rise in May, a 1.1 percent fall in April and increases of 0.3 percent in March and 2.1 percent in February. It was slightly firmer than the median forecast of a 0.6 percent decrease (forecasts ranged from 0.9 percent to 0.3 percent drops).

In the April-June quarter, retail sales gained 0.6 percent from January-March, when they were up 2.4 percent.

The ministry maintained its assessment after upgrading it for the second straight month in March, saying retail sales are"on an uptrend." The three-month moving average in seasonally adjusted retail sales was flat in June after rising 0.2 percent the previous month.

Sales of automobiles rose 19.3 percent on year in June for the 10th straight gain after rising 18.8 percent in May. Improving supply chains are supporting auto production and shipments.

Sales of food and beverages, a category which has the largest share in retail sales, posted their ninth straight rise, up 6.8 percent, after rising 6.4 percent the previous month as suppliers continued raising sales prices to reflect high import and production costs seen earlier.

General merchandise sales at department stores and supermarkets marked the 22nd straight year-over-year gain, up 4.6 percent in June, after rising 3.9 percent in May, 6.9 percent in April and 5.4 percent in March. Sales of apparel and accessories recorded the fourth straight drop, down 1.4 percent, after falling 3.7 percent the previous month.

Sales of fuels fell 3.9 percent on the year in June after falling 1.7 percent in May, 2.9 percent in April, 2.7 percent in March and rising just 0.2 percent in February. Energy prices have generally eased after a spike last year while the government has been trying to cap retail gasoline price markups by providing subsidies to refineries. The process of phasing out the subsidy program began in June and is scheduled to end in September.

Demand for medicine and cosmetics remained solid, up 9.5 percent in June, after a 10.5 percent gain in June. By contrast, sales of machinery and equipment (largely consumer electronics) marked their fourth straight year-over-year drop, down 3.6 percent, following a 5.3 percent drop.

Industry data released last week showed department store sales marked the 16th straight year-over-year rise in June, up 7.0 percent, following increases of 6.3 percent in May, 9.6 percent in April, 9.8 percent in March, 20.4 percent in February and 15.1 percent in January. Compared to the pre-pandemic June 2019, sales last month were down 5.1 percent, showing a steady improvement from sharper drops seen earlier.

The Japan Department Stores Association noted that sales of clothing and cosmetics led the solid overall gain amid higher temperatures and pent-up demand for traveling in the second half of the month after rain storms slowed activity in the first half.

The relatively weak yen and relaxed Covid border rules continued to boost spending by foreign visitors, up 320.3 percent on the year. It was just 0.8 percent below the level seen in June 2019, indicating inbound demand has recovered close to the pre-pandemic level.

Japanese retail sales are expected to post their 16th straight year-over-year increase in June, up 5.5 percent following a 5.8 percent gain in May, thanks to solid demand for automobiles amid improving supply chains, recovering department stores and higher prices for food and beverages, which together are mitigating the impact of falling fuel costs and sluggish appliances sales. On the month, retail sales are forecast to show a slight 0.6 percent drop on a seasonally adjusted basis after a 1.4% rise in May.

Retail Sales measure the total receipts at stores that sell durable and nondurable goods. The data are part of the Preliminary Report on the Current Survey of Commerce.

Another way to look at consumer spending in addition to the household spending survey is through the retail sales report. This report gives the total value of goods and services sold each month at retail outlets. The preferred number is the change from the previous year. The report serves as a direct gauge of consumption and consumer confidence. Consumer spending is one of the most important leading indicators for the Japanese economy. Increasing sales signal consumer confidence and economic growth, but higher consumption also leads to inflationary pressures.