Japan's soft consumer spending unlikely to deter BOJ from raising rates again

By Satoshi Sugiyama

TOKYO(Reuters) -Japanese household spending fell at a slower pace than forecast in October, but while the broader consumption trends remain soft the Bank of Japan is still expected to raise rates again to normalise monetary conditions after a decade of easy policy.

Some analysts say a recovery in wages would eventually spur consumers to loosen their purse strings and encourage the BOJ to keep pushing borrowing costs higher.

"Even in this situation, the BOJ is saying that consumption is firm," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.

He said the "BOJ will not change its assessment of consumption" based on just Friday's data alone, adding that another interest rate hike at this month's policy meeting cannot be ruled out.

Consumer spending dropped 1.3% in October from a year earlier, data from the internal affairs ministry showed on Friday, better than the median market forecast for a 2.6% decline, and compared with a 1.1% fall in September. On a seasonally adjusted, month-on-month basis, spending increased 2.9%, versus an expected 0.4% uptick.

Economists attributed the underlying softness in consumption to rising prices and warm weather, which held consumers back from purchasing seasonal apparel.

In recent days, many economists have cast doubt about the feasibility of increasing borrowing cost as the economy is yet to show signs of a sure-footed recovery.

However, some economists expect the BOJ could still tweak rates, citing a March meeting when it ditched negative rates despite sluggish consumption data. The central bank then raised rates again in July.

Policymakers can take comfort from Japanese companies' delivering a wage hike of 5.1% on average this year, the biggest increase in three decades.

Indeed, separate wage data also released on Friday showed Japan's base salary grew at the fastest pace in 32 years in October, boosting real wages after two months of decreases.

"Even if prices and consumption temporarily drop, as long as wages are rising, it is easy (for the BOJ) to say that the economy is on track," said Koya Miyamae, senior economist at SMBC Nikko Securities.

Just over half of economists polled by Reuters last month expect the BOJ to raise rates again on Dec. 19.

(Reporting by Satoshi Sugiyama; Additional reporting by Tetsushi Kajimoto; Editing by Leslie Adler and Shri Navaratnam)

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