Sentiment among Japan's barbers, shopkeepers and other merchants on the front lines of the economy dropped to a 2 1/2-year low as falling wages and a stock-market plunge discouraged consumers from spending.
The Economy Watchers index, a gauge of domestic demand via a survey of about 2,000 people who deal directly with consumers, fell to 44.7 points in July, a fourth monthly decline, the Cabinet Office said today in Tokyo. A number less than 50 means pessimists outnumber optimists.
Consumer-spending growth probably slowed in the second quarter to half the pace of the first, the government's gross domestic product report is expected to show next week. The lowest jobless rate since 1998 has yet to reverse a decade-long slide in wages that's constrained spending and left the economy dependent on exports.
“Domestic demand isn't very strong,'' said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. “Exports and export-driven capital spending remain the key to growth.''
The yen traded at 118.94 per dollar at 2:20 p.m. in Tokyo from 118.95 before the report was published. The Economy Watchers index was the lowest since it was 44.2 in December 2004.
An earthquake, a typhoon and rainfall double the historical average in some parts of Japan in July may have added to what Shiraishi called more permanent “negative factors'' depressing sentiment. The Topix stock index fell 3.9 percent in the month.
Niigata Earthquake
The Cabinet Office said the earthquake in Niigata, northwestern Japan, had only a limited effect on merchants' confidence. Only about 2 percent of the survey's respondents mentioned the quake, which killed 11 people and damaged a nuclear power plant.
Wages have failed to grow so far this year, even with unemployment at a nine-year low. Average pay only rose 0.3 percent in 2006, after falling 10 percent between 1997 and 2005.
A rollback of tax rebates in June added about 14,000 yen ($110) to the average tax bill for a family of four. The Social Insurance Agency said in May that the mishandling of pension records could result in billions of yen in unpaid benefits.
“The pension problem will continue to weigh on the consumer because it means less certainty about future income,'' Shiraishi said. “People will restrain current spending to prepare for the future.''
Household spending rose just 0.1 percent in June. Domestic car sales fell 9.7 percent in July, the 25th month of consecutive declines.
“Summertime personal consumption has been far from boisterous and we see a risk of continued slowing in July- September,'' said Takehiro Sato, chief economist at Morgan Stanley Japan Securities Ltd.
Prospects for consumer spending remain gloomy, today's survey showed. The outlook index, a measure of expectations for the next two to three months, fell to 46.7 in July, also the lowest since December 2004, the Cabinet Office said.
