Why Has Japanese Private Consumption Remained Firm?

May 11, 2006
Research and Statistics Department
Bank of Japan

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Abstract

1. Private consumption has been slowly recovering since around the year 2000. This recovery gradually became clearer from the second half of 2003, and its pace is now steadily increasing. The present expansion phase that began from early 2002 reached four years and three months in April 2006, rivaling the longevity of the bubble period. In examining the reasons why the ongoing recovery has lasted so long, one cannot overlook the continued firmness of private consumption together with the expansion in overseas economies and reduced structural adjustment pressures in the corporate sector.
2. The characteristics of private consumption in recent years are summarized as follows: (1) private consumption has remained firm despite significantly restrained household income under firms' strong stance toward restricting personnel expenses, and consequently the propensity to consume has been drifting upward; (2) this trend has been especially conspicuous among the elderly segment (senior citizens); and (3) by category, consumption of durable goods and services has been relatively strong. In addition, the improvement in consumption is spreading to younger age segments recently, supported by the rise in employee compensation.
3. As the background to this firmness of consumption, the underlying factors include (1) demographic factors such as aging of the population, (2) changes in consumer attitudes and efforts by firms, and (3) effects of the introduction of the nursing care insurance system. In addition, there were relatively strong influences from factors which pushed up consumption in each phase, such as (4) inertia in consumption, (5) improvement in consumer confidence and the wealth effect, and (6) improvement in actual employee compensation.
4. In this manner, private consumption has been upheld to some extent by structural and underlying factors over the past few years, and is recently becoming increasingly positive with the growth in income and assets. Estimated results of consumption function also indicate that the basis for the recent recovery in consumption has become firm, supported by such factors as the aging of the population, the rise in employee compensation, the wealth effect from higher stock prices, and the improved income outlook.
5. As for the consumption outlook, employee income is expected to keep rising, and household confidence regarding future income is projected to gradually strengthen. In addition, if the favorable performance of the corporate sector continues, this is expected to keep exerting a positive effect on consumption through such factors as higher stock prices. Furthermore, aging of the population will continue boosting the propensity to consume. Given these developments, there is a high probability that private consumption will continue to steadily expand for the time being, accompanied by a gradual rise in the propensity to consume.

This paper is a translation of the Japanese original, which was released on March 13, 2006. The original paper was prepared mainly by the staff of Economic Assessment and Projection, as follows. Analyses were conducted primarily by Hironori Ishizaki and Makoto Minegishi. Charts were prepared by Saki Amano. Yoshihito Saito formulated all of the analyses and wrote the text.