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Consumption in Japan expected to slowly recover in 2025

Written by Nikkei Asia Published on   4 mins read

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Luxury and leisure sales are rising, but inflation will still dent spending on daily goods.

Japan’s private consumption is showing signs of growth and is projected to rise through 2025 to get back to pre-Covid-19 levels. But inflation will polarize spending trends as many consumers opt to treat themselves with the occasional luxury item, but continue to be thrifty over everyday purchases.

According to December 2024’s ESP Forecast—a monthly survey of economists by the Japan Center for Economic Research (JCER)— economists predict for 2025 that there will be a continuous quarterly rise in private consumption, at a slow but steady rate ranging from 0.24–0.28%.

At Matsuya Ginza in Tokyo, overseas tourists are not the only customers splurging on luxury items. For wealthy Japanese customers, defined as those who spend over JPY 1 million (USD 6,400) per year, “prices do not matter when it comes to something that has value for them,” said Nobuhiro Hattori, vice store manager of the department store.

Luxury brand items are driving the store’s overall sales. Purchases by domestic customers for October and November 2024 surpassed 2023’s levels for those same months.

Customers buying luxury items were “people with a certain amount of leeway in their pockets,” Hattori said.

Private consumption showed signs of growth in 2024, rising by 0.6% in the April-June quarter and by 0.7% in between July and September. But temporary factors such as larger worker bonuses and one-off tax reductions contributed significantly to this boost in consumer sentiment, and it is not clear whether people are truly moving away from price-conscious shopping.

Real disposable income has generally not yet returned to pre-pandemic levels, with the occasional boost coming from one-off measures, said Taro Saito, an executive research fellow at NLI Research Institute. Without a consistent rise in disposable income, “consumption will not consistently increase,” he said.

Stronger consumer demand is essential to achieve what Prime Minister Shigeru Ishiba calls a “growth-oriented economy driven by wage increases and investment” and to end decades of stagnant wages and price levels.

Official data show that Japan’s real wages may be bottoming out from a three-year decline, during which incomes have not kept up with prices. The number of employed has also been on a continuous rise over the past year.

Hattori predicts that wealthy customers will continue to drive sales in 2025, and that “there is room for spending per customer to rise further,” he said.

Typical consumers, those who spend less than JPY 1 million, are also not visibly cutting back on their spending habits, at least at the department store, according to Hattori. Clothing sales were weaker due to warmer-than-usual weather toward the end of the year, but sales of other items such as cosmetics have been strong.

Yuka Kondo, R&D director at Hakuhodo Institute of Life and Living, a think tank, said, “Daily necessities are the worst hit by the weak yen and inflation” when it comes to consumer sentiment. Such goods include daily consumables, food and beverages.

According to Kondo, customers are just being selective rather than saving all their money, and they are willing to splash out on special occasions, such as for travel, leisure, or to treat themselves during the year-end holidays.

The think tank’s survey shows that travel and savings are the top two targets for people’s disposable income in 2025. This, Kondo says, also indicates that consumers are both “aggressive and defensive,” meaning that they do not hesitate to spend money on certain occasions but opt to be more budget-conscious regarding their daily, more mundane shopping needs.

Wages are projected to rise in 2025, driven by a labor shortage and strong corporate profits, while inflation is expected to cool off.

The JCER’s economist consensus predicts that Japan’s core consumer price index in 2025 will rise at 2.54% in the first quarter and 2.34% in the second quarter, but ease to 2.04% and 1.91% in the third and fourth quarters, respectively.

Kanako Nakamura, an economist at the Daiwa Institute of Research, says better wages will be key for consumption. Wage growth has so far been stronger for younger employees—those in their 20s. But given the seniority-based wage systems applied at many Japanese companies, Nakamura expects wage growth to spread across a wider age range in 2025, which will help boost consumption.

However, there are still some dark clouds lingering over the inflation rate. If the yen continues to weaken or companies opt to pass higher labor costs onto prices, the inflation rate could rise higher than expected, Nakamura said.

A major focus of attention at the start of 2025 will be on the Diet, where lawmakers are debating whether to raise the minimum taxable income threshold. Currently it is set at JPY 1.03 million (USD 6,592) a year. One opposition party is calling for this to be raised to JPY 1.78 million (USD 11,392), and Ishiba’s ruling coalition is expected to at least approve some increase in the threshold, which would benefit many taxpayers permanently.

“If permanent tax cuts are realized, consumption can be expected to increase further,” NLI Research Institute’s Saito said.

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.

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