Japan's real household spending unexpectedly posted its first year-on-year drop in six months, down a sharp 3.0% in October (consensus +1.6%), hit by a plunge in purchases of automobiles (-0.86 point contribution) after recent gains. The overall spending slump followed increases of 1.8% in September, 2.3% in August and a recent peak of a 4.7% jump in May.

Among other factors, consumers have been shedding expenditures on food and beverages (-0.34 point) amid sticky inflation and falling real wages. The decline in October was also led by lower mobile communications fees and hotel charges (-0.57 point contribution) as well as a volatile factor of home maintenance and repair (-0.58 point), which marked the fourth y/y drop in a row.

The core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, fell 1.5% on the year after rising 2.0% the previous month, when the overall spending rose 1.8%.

Industry data showed last month that department store sales rose 4.3% for the third straight year-on-year gain in October, driven by high demand for sweaters and overcoats amid the cold weather as well as lingering strength in sales of cosmetics, watches and jewelry. Today's data also showed households spent more on clothing (sweaters, shirts) and footwear for the first time in two months in October, lifting overall spending by a slight 0.19 point, after trimming expenditures on the category by 0.20 point in September (mostly kimono).

Details:
•Japan Oct real household spending -3.0% y/y (Sept +1.8%), first fall in 6 months; median forecast +1.6% (range: +0.3% to +2.2%)

•Japan Oct real household spending s.a. -3.5% m/m (Sept -0.7%), second straight drop; median forecast +0.8% (range: -0.1% to +2.7%)

•Japan Oct real core household spending (ex-housing, vehicles, gift money) -1.5% y/y vs. +2.0% in Sept when overall spending rose 1.8%

•Japan Oct household spending y/y posts unexpected fall led by auto purchases, mobile communications, hotels

•Japan Oct average real household income -0.1% y/y (Sept 0.0%); +3.3% in nominal terms (Sept +3.4%)

•Japan official: Oct household spending drop mainly caused by falls in auto purchases, which dropped for first time in 9 months

•Japan official: Mobile communications dropped as households may have shifted to cheaper plans

Japan’s real household spending is forecast to rise 1.6% on the year in October,
marking a sixth straight month of year-on-year growth after a 1.8% rise in
September, which was driven by higher spending on automobiles, medical
services and donations.

On a month-on-month basis, household expenditure is expected to increase
0.8% in October, following a 0.7% decline in the previous month.
The uptrend in October spending is likely supported by stronger sales at
department stores, convenience stores and supermarkets nationwide during the
month.

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.