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Japanese households cut spending more than expected and retail sales fell for the first time in seven months in January, data showed on Friday, a sign the central bank's radical stimulus has yet to convince consumers that inflation will take hold.
In contrast to the gloom felt among households, companies look to be in better shape as they begin to benefit from the competitive advantage their goods get from a weak yen.
Factory output jumped at the fastest pace in nearly four years in January as companies ramped up spending at home and won more orders in emerging markets, suggesting that exports will keep the economy on track for a moderate recovery.
But the soft consumption underscores the uneven nature of the recovery and poses a headache for the Bank of Japan, which hopes its aggressive money printing will drive up inflation expectations and prompt households to spend more.
"If consumer spending doesn't pick up by April, it will be difficult for industrial production to accelerate," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
Separate data also underscored the dilemma the BoJ faces with inflation grinding to a halt on slumping oil prices, moving further away from its ambitious 2 per cent target.
Weak at home, strong abroad
The weak consumer mood has kept a lid on spending as wages have yet to increase enough to make up for the sales tax hike last April, casting doubt on the strength of the economic rebound.
Household spending fell a more-than-expected annual 5.1 per cent in January in the 10th straight month of declines, the longest losing streak since the global financial crisis in 2009. Annual retail sales also dropped a worse-than-expected 2.0 per cent.
In a glimmer of hope, factory output jumped 4.0 per cent in January, more than a median market forecast for a 2.7 per cent gain and marking the biggest increase since 2011, data by the trade ministry showed.
"Output is showing signs of an export-led recovery" as solid US demand continues to act as a driver of global growth, said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.
"This virtuous cycle of factory activity will continue to underpin Japanese output and capital spending ahead."
But manufacturers surveyed by the ministry expect output to rise only slightly in February and fall 3.2 per cent in March, as overseas orders for machinery and electronic parts peak from current very high levels, a ministry official told reporters.
That underscored the uncertainty on whether overseas demand will remain strong enough to make up for the persistent weakness in private consumption.
The mixed data will keep the BoJ under pressure to maintain its stimulus, although Governor Haruhiko Kuroda has stressed he saw no need to ease again soon.
Many analysts expect households to start spending more as slumping oil prices push down the cost of living and companies, which have enjoyed strong earnings, accept labour demands to hike base salary in March wage negotiations.
Stripping away the effect of last year's tax hike, core consumer price index - which excludes volatile food but includes oil costs - rose just 0.2 per cent in January year-on-year, less than expected and slowing from 0.5 per cent in December.
The BoJ argues that falling oil prices will lift inflation in the long run as it allows households and companies to spend more on other goods, thereby boosting the economy.
But analysts are deeply suspicious of whether the BoJ can meet its pledge of hitting its inflation target in the year beginning in April, as they expect it to take at least six months for the benefits of oil price falls to boost growth.
