Key points:
--Japan's real average expenditures by households with two or more people rose a modest 1.3% on the year (vs. consensus +3.1%) in June, slowing from +4.7% in May but better than -0.1% in April. The increase was driven by vehicle purchases, home maintenance/repairs both volatile factors and computers with upgraded Windows operating systems. New car sales are on a recovery trend from suspended output at the Toyota Motor group in the quarter of 2024 over safety check scandals.
--The increase was partly offset by declines in foodstuffs (the first drop in three months was caused by rising prices of meat, etc.), overseas package tours and gift money (due to simplified weddings and funerals). Spending on air conditioners saw a 13.0% y/y pullback after a 45.6% surge in May, when the unusually early arrival of a heat wave prompted many households to front-run purchases.
--The core measure (excluding housing, motor vehicles and remittance): -0.4% y/y vs. +2.5% in May.
--On the month, overall spending plunged a seasonally adjusted 5.2% (consensus -2.0%) vs. +4.6% in May and -1.8% in April.
--The average real income of households with salaried workers: -1.7% vs. +0.4% in May, marking its first drop in three months.
--In another set of data released by the labor ministry this week, total monthly average cash earnings per regular employee in Japan posted their 42nd straight year-on-year rise, up a nominal 2.5% in June, accelerating from 1.4% in May and 2.0% in April. It was led by one-off payments and base wages, the latter of which was up 2.1% vs. +2.0% the previous month. However, real wages recorded their sixth straight y/y drop, down 1.3% vs. -2.6%.

Takeaway: Easing but still high 3% inflation is eroding consumer purchasing power, keeping many households cautious about spending beyond necessities. The consumption trend index, which was also released Friday, showed a real 0.4% increase on quarter in April-June, partially rebounding from a 0.7% dip in January-March. It indicates sluggish private consumption is likely to post a rise in the G2 GDP data due on Aug. 15, which Is forecast to post a slight rebound after recording the economy's first contraction in four quarters in January-March.

Key forecast points:
--Japan's real average expenditures by households with two or more people is forecast to risen a modest 3.1% on the year in June amid slightly easing inflation and a relentless heat wave. It would follow a 4.7% rise in May, which was mainly driven by vehicle purchases, a volatile factor, but was also backed by a continued post-pandemic pickup in eating out and a surge in demand for air conditioners amid early summer heat and humidity. Those two factors likely led spending in June.
--Seasonally adjusted spending is seen down 2.0% on the month after rebounding 4.6% in May, plunging 1.8% in April and rising 0.4% in March.

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.