Japan's real household spending fell more sharply than expected in May for a third straight decline on the year as motor vehicle purchases, a volatile factor, slipped after a recent pickup, and mobile phone users continued switching to discount plans amid high costs for daily necessities, but spending on traveling and eating out remained strong on pent-up demand, data released Friday by the Ministry of Internal Affairs and Communications showed.

Both the government and the Bank of Japan have been providing stimulus to help the economy recover fully from the pandemic-caused slump. The negative output gap has narrowed recently but real wages remain depressed. Nominal wages are expected to grow at a fast pace this year amid labor shortages in some sectors.

The Econoday Consensus Divergence Index stood at minus 6, below zero, which indicates the Japanese economy is performing slightly worse than expected after outperforming earlier. Excluding the impact of inflation, the index was at minus 19.

Real average spending by households with two or more people slumped 4.0 percent on the year in May after slumping 4.4 percent in April, falling 1.9 percent in March and rebounding 1.6 percent in February on a 0.3 percent dip in January. It was weaker than the median economist forecast of a 2.5 percent drop (forecasts ranged from a 2.9 percent drop to a 0.9 percent gain). The decrease was the sixth in 12 months.

Most of the 4.0 percent decline came from volatile factors comprising motor vehicle purchases and"other expenditures" (financial support for dependents, etc.), which together pushed down the overall spending by 3.55 percentage points.

Core real expenditures, which exclude volatile items like housing (repairs, maintenance, rent), automobiles, gift money and support for family members who live separately, fell at a slower pace of 1.5 percent on year in May.

The real spending adjusted index (2020 = 100) stood at 97.9 in May, down sharply from 99.0 in April, 100.3 in March, 101.1 in February and 103.6 in January (the highest since 104.9 in April 2021). It was the lowest since August 2021, when the index was also at 96.2.

The decline was led by a pullback in purchases of motor vehicles (cars, trucks, motorcycles and boats) after improved supply chains had supported faster deliveries in recent months, as well as the widespread move among mobile phone users to switch to discount plans as their purchasing power has been eroded by surging costs for food and durable goods.

Households continued spending less on groceries and prepared food, compared to the earlier phase of the pandemic, when households had cooked more at home and bought takeout food to avoid close contact.

Backed by the government's tourism subsidy program, households continued spending more on traveling and eating out, compared to a year earlier when Covid restrictions were still in place. As seen in April, people also spent more on overseas trips, particularly during the Golden Week holidays through early May, as the government had ended most of its border control on entries and re-entries by end-April. Real spending on electricity rose on the year in May as utility prices were lowered by subsidies and a cut in the renewal energy promotion surcharge on electricity bills.

On the month, real average household spending fell a seasonally adjusted 1.1 percent in May after falling 1.3 percent in April, dipping 0.8 percent in March, slumping 2.4 percent in February and rising 2.7 percent in January. The decline was the eighth in 12 months and weaker than the consensus forecast of a 0.5 percent rise (forecasts ranged from being flat to a 3.9 percent gain).

The average real income of households with salaried workers posted the eighth straight year-on-year drop, down 7.5 percent in May (down 4.0 percent in nominal terms) after falling 1.4 percent (up a nominal 2.6 percent) in April and a real 4.5 percent and a nominal 0.9 percent in March. The main bread-earner's real income in the average household marked the fifth straight year-over-year drop while the average spouse real income posted the first drop in 16 months, both partly due to shorter overtime working hours.

Japan's real household spending is forecast to post a third straight drop on year in May, down 2.5 percent, amid a widespread move to switch to discount mobile phone plans. But the pace of decline is seen slowing from 4.4 percent in April because the year-over-year increase in the CPI minus home owners' equivalent rent -- the inflation measure used to calculate real expenditures -- eased to 3.8 percent in May from 4.1 percent in April.

On the month, real average spending by households with two or more people is expected to rise 0.5 percent for the first increase in four months after falling 1.3 percent in April. New vehicle sales have been increasing on faster deliveries amid improved supply chains. More people are eating out in many regions and traveling more freely in the absence of strict public health rules and thanks to domestic travel subsidies.

Household Spending is an important gauge of personal consumption, which accounts for roughly 55 percent of Japan's gross domestic product. It is part of the monthly Family Income and Spending Report.

The report looks at spending of households and gives a picture of consumer spending. Increases in household spending are favorable for the Japanese economy because high consumer spending generally leads to higher levels of economic growth. Higher spending is also a sign of consumer optimism, as households confident in their future outlook will spend more. The preferred number is the change from the previous year. The data are part of the family income and expenditure survey which is released at the same time as the employment and unemployment data.