By Jason Clenfield
April 16 (Bloomberg) -- Hiroko Kobayashi, a 65-year-old grandmother from Nagoya, Japan, says she's starting to feel a little more comfortable about spending now that the bank pays her more interest.
``If I can earn a little money on my savings, it'll mean I can go out and get a few things for my grandkids,'' she says.
Japan's penny-pinching savers and earnest salarymen may at last be ready to loosen their purse strings as bank deposits earn more and millions of workers collect retirement windfalls. Economists forecast consumer spending will accelerate this year as demand awakens in the world's second-largest economy after a decade of deflation and stagnant wages.
Japan needs the boost to keep its economy growing as demand from the U.S. wanes, says Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. ``If the U.S. slowdown is moderate, household spending will gradually firm up and it'll be enough to keep the economy growing at the current pace,'' he says.
The World Bank says consumer spending will help Japan's economy expand at a 2.3 percent rate this year, up from 2.2 percent in 2006. Growth is picking up even after Japanese manufacturers cut production in January and February because of reduced demand from the U.S. and elsewhere in Asia.
Vindication for Fukui
Sustained growth would vindicate Bank of Japan Governor Toshihiko Fukui's policy of raising the benchmark overnight rate, currently 0.5 percent, from near zero last year. It might also provide a welcome boost for Prime Minister Shinzo Abe's shaky government, which is facing its first parliamentary elections in July.
The Japanese consumer has so far proven an elusive target. Previous predictions of a spending spree, most recently last year, turned out to be premature: Consumer spending rose 0.9 percent in 2006, the slowest in three years, and was flat in the second half of the year.
Some are still skeptical. ``I'm not entirely convinced that strong consumer spending can be taken for granted'' because the savings habit is so deeply ingrained, says Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``There are good reasons to be optimistic this year about consumer spending, but I remain cautious because of the risk of a rebound in savings rates.''
Rising Spending
Still, household spending rose in January and February after falling every month last year. Demand for services reached a record in January and department-store sales rose in February at the fastest pace in almost a year.
``The latest round of data has offered encouragement that the recovery is finally filtering down to households,'' says David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, is now paying 0.2 percent on regular savings accounts, up from 0.001 percent before the Bank of Japan raised rates in July. Takuji Aida, chief economist at Barclays Capital in Tokyo, says higher rates may generate as much as 1.5 trillion yen ($12.6 billion) in household interest income.
Interest and dividend income this year will boost private consumption by 1 percentage point, according to Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former Bank of Japan official.
New Retirees
Payments to new retirees this year may contribute another 0.2 percentage point to spending growth, according to Takashi Omori, chief economist with UBS Securities Japan.
Over the next three years, 6.9 million people born in Japan's post-World War II baby boom reach the retirement age of 60. The Cabinet Office estimates that lump-sum payments to this year's retirees, in addition to their pensions, will total about 9 trillion yen. That works out to an average of 17.5 million yen, or about $147,000, per person, according to UBS Securities Japan Ltd. in Tokyo.
Aeon Co., Japan's largest retailer, has its sights on the wave of retirees. Aeon last month started a promotion to encourage them to use some of the windfall to spruce up their wardrobes. The ``re-fresh-man campaign'' offers discounts on blazers and sportswear to customers who trade in their old business suits. ``Response has been a lot better than we expected,'' says Aeon spokesman Takeshi Kodama.
The Japanese workers reaching retirement age over the next three years represent 5.4 percent of the population, and have assets totaling 130 trillion yen, almost 10 percent of all personal financial holdings, according to Dai-ichi Life Research Institute Inc.
Sashimi or Steak
New retirees ``are going to change how they spend their money,'' says Aeon's Kodama. ``They're going to do things like take trips and treat themselves to nice meals at home. We expect them to buy travel gear or sports equipment, and to splurge on a better cut of sashimi or steak.''
Economists say the retirements of the next few years may help set the stage for a lasting improvement in consumer spending by opening more full-time job opportunities for younger Japanese, giving them more money to spend.
In the decade after Japan's asset bubble burst, companies replaced full-time employees with part-time workers, whose pay averages less than half that of regular employees, according to Atsushi Seike, professor of labor economics at Tokyo's Keio University and a member of the government's labor policy council.
From 1997 to 2005, average pay fell about 10 percent, labor ministry reports show; one in three workers held a part-time or temporary position last year, compared with one in five a decade earlier.
Toyota's Plans
Still, the number of full-time employees grew last year for the first time since 2003, and indications are the trend is continuing. Toyota Motor Co., Japan's third-largest private employer, plans to increase its domestic new hires 11 percent to 3,500 people in fiscal 2008. Fast Retailing Co., Japan's largest clothing chain, will more than double its full-time workforce in the next year.
``Employers realize the cuts to their regular workforces were excessive,'' Seike says. ``We're seeing an adjustment.''
As the employment picture improves, Japan's consumers may change their savings habits too. The savings rate may come down to about 13 percent of disposable income this year from almost 16 percent at the end of 2006, says Jesper Koll, chief Japan economist at Merrill Lynch & Co. in Tokyo. ``Consumer demand is the key economic dynamic in Japan from here forward,'' he says.
For Kobayashi, the Nagoya grandmother, the calculation is simpler. ``I'm an old lady and my only income is a pension,'' she says, and anything that gives her more money to spend ``is a good thing.''
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
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