Japan’s weak December household spending underscores inflation’s bite on consumers but is unlikely to derail expectations for BOJ tightening later this year.

Summary:

• Japan’s December household spending fell sharply, badly undershooting expectations both month-on-month and year-on-year.

• The data suggest inflation pressure is biting into real household incomes, weighing on consumption late in 2025.

• Analysts see the weakness as unlikely to materially change the BOJ’s inflation outlook, with the impact already largely anticipated.

• The figures may reinforce the BOJ’s resolve to lean against inflation, potentially supporting expectations for an earlier rate hike.

• Separately, Japan’s foreign reserves rose to $1.395trn, underscoring ample capacity to support the yen if required.

Japanese household spending fell sharply in December, highlighting the growing drag from higher prices on consumer activity and reinforcing the delicate policy backdrop facing the Bank of Japan.

Official data showed household spending dropped 2.9% month-on-month, far weaker than the 1.3% decline expected and reversing November’s strong 6.2% rise. On an annual basis, spending fell 2.6% year-on-year, compared with expectations for flat growth and following a 2.9% increase previously. The figures point to a clear deterioration in consumption momentum at the end of 2025.

Analysts say inflation pressures are increasingly weighing on household budgets, particularly as price rises for food, energy and services outpace wage growth for many consumers. December’s weakness suggests households are becoming more cautious, trimming discretionary spending as higher living costs erode real purchasing power.

From a policy perspective, the data are unlikely to materially alter the outlook at the Bank of Japan. Markets and analysts broadly view the impact of softer consumption as already factored into the BOJ’s forecasts, with inflation dynamics, rather than growth, remaining the dominant driver of policy decisions. Indeed, some see the spending slump as reinforcing the BOJ’s mandate to contain inflation pressures, rather than delaying normalisation.

Market pricing continues to lean toward a possible BOJ rate hike as early as April, with another move potentially later in the year, depending on inflation persistence and wage developments. The December consumption data may add to the debate, but are unlikely on their own to derail expectations of gradual tightening.

Separately, Japan’s foreign exchange reserves rose to $1.395 trillion at end-January, signalling that authorities retain substantial firepower. The stockpile suggests the Ministry of Finance and BOJ have ample capacity to stabilise the yen if intervention becomes necessary.