Japan's weak household spending, services activity, hint at recession

By Stanley White

TOKYO (Reuters) - Japan's household spending unexpectedly contracted in April and services sector activity slowed in May, figures out on Tuesday showed, raising the possibility of the economy falling into recession this quarter.

Economists say it is too early to definitively say a recession is the most likely outcome, but they warn that the chance of one will increase if domestic demand indicators do not improve before the end of June.

The economy unexpectedly shrank over January to March, so another quarter of contraction would meet the technical definition of a recession, and bring the longest run of growth since the 1980s bubble economy to a dramatic end.

Doubts about the outlook suggest that Prime Minister Shinzo Abe's five-year-long 'Abenomics' campaign to reflate the economy is sputtering.

"It would be excessive to call for a recession now, but the economy is not bouncing back strongly," said Hiroaki Muto, economist at Tokai Tokyo Research Center.

"Any further disappointing data could start to be interpreted as a sign that a recession is becoming more likely."

Household spending fell in April as consumers spent less on utilities, cars, domestic travel and leisure, data out on Tuesday showed.

Because consumption accounts for more than half of Japan's gross domestic product, reduced spending suggests the economy is on a weak footing, undermining policymakers' efforts to achieve sustainable growth and inflation.

"I still expect the economy to rebound in the second quarter, but if consumer spending continues to weaken then I may revise down my expectations," said Daiju Aoki, regional chief investment officer for Japan at UBS Securities.

"Household spending was surprisingly weak and consumer confidence is flattening."

Moreover, the services sector reported that May's monthly growth in new orders was the slowest since September 2016, further suggesting the economy is losing momentum in the second quarter.

The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) fell to 51.0 in May from 52.5 in April. Less than 50 indicates a contraction.

"There were worrying signs of deteriorating demand conditions, with new sales increasing at the softest rate in 20 months," said Joe Hayes, economist at IHS Markit, which compiles the survey.

The composite PMI, which includes both manufacturing and services, fell to 51.7 from 53.1 in April.

Many economists expect Japan's gross domestic product to resume expansion in the second quarter, but a smaller-than-expected increase in industrial production and a build up of unsold inventory in April has raised doubts about the strength of the economy.

The government will issue revised first quarter gross domestic product data on Friday. The technical definition of a recession is two consecutive quarters of contraction.

Continued weak spending would make Japan's economy more dependent on export demand, which is at risk from the U.S. government's protectionist trade policies.

The household spending data also dampened expectations that the Bank of Japan can achieve its 2 percent inflation target, an important benchmark in the central bank's drive to energise the economy and prevent a return to deflation.

(Reporting by Stanley White; Editing by Eric Meijer)