Key points:
--Japanese retail sales slowed to a 2.2% rise on the year in May from 3.3% in April as fuel prices slipped and department store sales suffered a fourth straight y/y drop, hit by lower inbound spending amid a firmer yen and in playback for record sales to visitors from overseas a year earlier. Overall, drugs and cosmetics supported retail sales while hot weather boosted demand for air conditioners and summer clothing. New vehicle sales have also picked up after last year's production suspension by the Toyota Motor group over safety test scandals.
--The Ministry of Economy, Trade and Industry downgraded its assessment for the first time in eight months after upgrading it in the February report, saying retail sales are taking one step forward and one step back. Previously, sales were on a gradual pickup trend. On the month, retail sales dipped a seasonally adjusted 0.2%, as expected, after rising a revised 0.7% in April. METI pointed to a second straight drop in the three-month moving average in sales, down 0.2% in May and 0.1% in April vs. +0.2% in March.

Takeaway: The recent appreciation of the yen and stricter duty-free shopping rules have led to slower spending by visitors from overseas but retail sales, up for more than three years, are expected to continue posing year-on-year gains, albeit at a modest pace amid falling real wages in Japan.

Key forecasts: Japanese retail sales slowed down in May, hit by sluggish department store sales, falling fuel prices and a pullback in vehicle sales after a recent recovery. Many department store chains report inbound spending continued falling from a year earlier when the yen was much weaker at around Y156 (vs. Y145 last month) that had boosted purchasing power of visitors from other countries.
--Retail sales +2.2% y/y vs. +3.5% (revised from +3.3%) in April; -0.2% m/m vs. +0.7% from +0.5%).

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.