In May 2025, Japanese household spending surged by 4.7% compared to the same month last year, significantly exceeding market expectations of a mere 1.2% increase.

This notable rise in spending followed a historic 5.25% wage increase, the largest in 34 years, negotiated by Japan's largest labor union group, Rengo, aimed at alleviating inflation-related cost pressures.

A significant contributor to this increase was a surge in automobile purchases, rebounding from previous disruptions caused by a safety certification scandal.

Additionally, spending on dining out and tourism also showed strong growth, indicating a broader recovery in consumer confidence post-pandemic.

The rise in household expenditures reflects the Japanese government's intensified efforts to stimulate domestic consumption amid ongoing inflation.

Despite these positive trends, inflation remains stubbornly above the Bank of Japan's 2% target, with real wages declining even as nominal wages rise.

Concerns linger among policymakers regarding the impact of global trade tensions, particularly U.S. tariffs, which could undermine wage growth and complicate monetary policy.

Approximately 64% of economists believe that U.S. tariffs, especially a 25% levy on cars and car parts, could trigger a recession in Japan, the world's fourth-largest economy.

On July 4, 2025, the Japanese yen appreciated to around 144 per dollar, recovering from previous losses due to stronger domestic economic data.

The Bank of Japan is closely monitoring these consumption and wage trends to assess economic strength and determine the timing for potential interest rate hikes.

As inflation affects voters' sentiments ahead of the July 20 upper house election, Prime Minister Shigeru Ishiba is proposing cash handouts for households while opposition parties advocate for sales tax cuts.

Upcoming wage data for May is expected to provide further insight into the economic situation as Japan navigates these challenges.