Japan's real household spending unexpectedly slumped 1.8 percent on the year in May, well below the consensus call of a 0.2 percent rise, as consumers slashed purchases of fresh vegetables whose prices had soared on bad weather while the weaker yen discouraged many people from booking overseas package tours.

The decrease, which followed a 0.5 percent rise in April for the first gain in 14 months, was also due to lower electricity bills paid in May after the northern region had mild weather in April. The widespread move among cell phone users to switch to discount plans also continued. Demand for domestic hotel stays has already waned after subsidies for hotels and transportation aimed at supporting the tourism industry were phased out late last year.

On the upside, resumed production and shipments at Toyota group firms in March led to smoother deliveries of vehicles, prompting higher auto purchases. Households also spent more on medical and dental treatment and gave more gift money at weddings and other ceremonies as the economy had entered a post-Covid phase.

The core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, fell a sharper 3.4 percent on the year in May after being flat in April and falling 2.0 percent in March.

On the month, real average expenditures by households with two or more people dipped a seasonally adjusted 0.3 percent, after slumping 1.2 percent in April for the first decline in three months and marking a 1.2 percent rise in March. It was weaker than the median forecast of a 0.7 percent rise (forecasts ranged from 0.5 percent to 1.0 percent gains).

Econoday's Relative Performance Index stands at plus 1, just above zero, which indicates the Japanese economy is performing largely expected. Excluding the impact of inflation, the RPI is at minus 7.

In a positive development, the average real income of households with salaried workers posted the first year-over-year increase in 20 months in May, up 3.0 percent, after falling 0.6 percent in April. In nominal terms, the increase was a bigger 6.4 percent, accelerating from a 2.3 percent gain in April. Companies are raising wages at a higher pace this year but overall income was also up on a jump in regular pay in May, which was largely in reaction to an unusually low amount in May 2023.

Japan's real household spending is forecast to post its second straight year-over-year increase in May, but up just a slight 0.2 percent, as high living costs are making many consumers cautious, following an as-expected 0.5 percent gain in April, which was the first rise in 14 months. On the month, real average expenditures by households with two or more people are expected to rebound 0.7 percent on a seasonally adjusted basis, partially recovering from the 1.2 percent slump the previous month. Automobile purchases appeared to have rebounded after resumed vehicle production in March raised availabilities while demand for brand name goods remains strong at department stores.

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.