Japan: Gloomy Consumer Sentiment and Uncertain Interest Rate Future

Consumer sentiment in Japan deteriorated in December, as shown by a recent government survey. This puts pressure on the optimistic expectation of the Bank of Japan that strong consumer behavior could support the economy and justify an increase in interest rates. If sentiment does not improve, the planned rate hike at the upcoming Bank of Japan meeting on January 23 and 24 could be in question. Consumer confidence fell to an index value of 36.2 in December, a decrease of 0.2 points compared to the previous month, according to the Cabinet Office survey. At the same time, Japan's output gap, an indicator of the difference between actual and potential economic output, remained negative for the 18th consecutive quarter in the July-September quarter. Such a gap is a sign of weak demand and indicates that the economy is operating below its full capacity. These findings highlight the vulnerability of the Japanese economy as rising living costs and uncertainties about the policies of designated U.S. President Donald Trump weigh on consumption and exports. Despite these challenges, some large companies have signaled their determination to continue offering significant wage increases. For example, Fast Retailing, the parent company of the fashion brand Uniqlo, plans to increase salaries for full-time staff at its headquarters and in sales by up to 11% from March. Lawson's Convenience Store chain president, Sadanobu Takemasu, also reiterated his intention to raise wages steadily and sustainably. In March, the Bank of Japan ended a comprehensive stimulus program and raised short-term rates to 0.25% in July, believing that Japan's economy was on the verge of permanently reaching the 2% inflation mark. The governor of the Bank, Kazuo Ueda, has signaled that he is prepared to raise rates further, provided Japan continues to make progress towards achieving its inflation target. However, the central bank is keen to closely monitor developments in wage increases this year to determine the timing of further rate hikes.