Japan downgrades its economic assessment due to sluggish consumer spending

TOKYO (Reuters) – Japan's government downgraded its assessment of the economy in February for the first time in three months due to sluggish consumer spending, signaling a bumpy road out of recession given slow wage recovery and lackluster industrial production.

The government also lowered its consumer spending forecast for the first time in two years and said the recovery appeared to be “stalling,” underscoring the challenge for the Bank of Japan, which plans to exit its ultra-loose policies this year.

The negative assessment came after data last week showed the Japanese economy unexpectedly slipped into recession in the fourth quarter due to weak domestic demand, losing its position as the world's third-largest economy to Germany.

“The economy is recovering moderately but appears to have stalled recently,” the Cabinet Office said in its report on Wednesday. It was the first downgrade since November 2023.

The lower consumer spending estimate was due to a pause in the recovery in services spending and a decline in spending on consumer goods due to factors such as price increases.

The country's real wages fell for 21 straight months in December as inflation outpaced wage recovery and continued to weigh on household spending.

The suspension of some automobile production and deliveries led the government to lower its estimate of industrial production for the first time since March 2023. She said that while industrial production would pick up again, “manufacturing activity has recently declined.”

The halt in production at Toyota Motor's small car division Daihatsu due to safety issues has affected automobile production. Toyota also stopped shipping some models after irregularities were found in certification tests for diesel engines developed by its subsidiary Toyota Industries.

The recovery in capital spending also appears to be “stalling,” said the report, maintaining the same view as last month.

Companies' investment plans were sound, but their investments were not realized partly due to labor shortages, a Cabinet Office official said.

The government reiterated that it must pay “full attention” to the impact of the earthquake that killed about 240 people on Japan's Noto Peninsula on New Year's Day. Analysts expect the earthquake to have little short-term impact on the economy.

(Reporting by Kaori Kaneko; Editing by Shri Navaratnam)