Japan Consumption & Inflation: UBS Evidence Lab inside

UBS Evidence Lab conducted a survey of 1,000 Japanese consumers regarding their awareness of inflation. In the survey, 1) 54% of respondents said they were ‘spending more due to increases in price’; 2) in response to price rises, consumers surveyed showed a strong sense of restraint in spending, saying they would ‘buy smaller quantities or buy the product less often’ (36%) rather than trade down (22%), which was unexpected; and 3) the respondents expecting an increase in income was only 8% in Japan – far below the level found in US and ASEAN surveys. Consumers are not optimistic.

Macro data have shown nominal consumption growing alongside price increases. The survey results highlight a pattern of consumers spending more now but that they would manage the total spending by restraining consumption and frequency of shopping or by buying substitutes, which is consistent with our expectations. From a macroeconomic point of view, savings rates are high, suggesting good potential for consumption to recover. Still, households are managing total spending conservatively. Although our views will depend on future survey results, at present we note a low probability that inflation will continue at over 2% – that is, that price increases will continue.

First, it is somewhat positive for the retail sector that we have confirmed consumer awareness that consumption expenditure is growing as a result of higher prices, because, with cost increases continuing since H2 2021, the stock market has factored in the risk of companies being unable to pass rising costs on to product prices. Second, it is slightly surprising that consumers intend to protect their lifestyles from rising prices by purchasing less rather than by trading down. In evaluating retail stocks, it will be important for companies not simply to adopt low prices or to lower prices but to manage profits based on product differentiation or assuming lower volumes. We have also analysed the implications for consumer goods, services, and the financial sectors.