Domestic consumption in Japan is showing signs of recovering from the effects of inflation, according to quarterly economic data released on October 1, though the persistent shortage of workers remains a downside risk.
In the September edition of the Bank of Japan’s Tankan survey of business sentiment, the category for accommodations, eating and drinking services had a diffusion index of 52, matching the record high reached in March. The diffusion index in the retail sector climbed 9 points from the June survey to 28.
Among individual retailers, Daimaru Matsuzakaya Department Stores saw same-store sales rise 5.4% on the year in preliminary September figures. Supermarket chain Inageya enjoyed a 3.7% gain in same-store sales that month, and customer traffic grew by 3.7%.
“Sales of corn, bell peppers and other vegetables have been particularly strong,” an Inageya representative said.
At the Prince Hotel chain, sales in the accommodations segment jumped by roughly 20% on the year during the six months ended September. The occupancy rate rose 5 points.
Fueling these numbers was inbound demand by visitors from Western countries, Australia, mainland China, and Taiwan. These guests mainly stayed in Prince Hotels located in Tokyo.
Spending by international travelers coming to Japan, along with higher pay among Japanese residents, has propped up domestic consumption. Real wages grew on the year for two months in a row in June and July, and the BOJ’s consumption activity index increased for two consecutive months on a month-to-month basis.
At the Uniqlo casual wear chain, same-store sales in Japan were up about 6% on the year in August to mark an eighth straight month of growth. This figure includes online sales.
“The movement of essential goods is strong, and customers are also increasing purchases of additional items when they visit stores seeking new products,” a Uniqlo representative said.
A larger number of businesses are passing higher costs to retail prices. There are 2,911 products that will receive price hikes in October, according to Teikoku Databank, exceeding the April figure.
This is “the biggest rush in price hikes this year,” Teikoku Databank said.
Overall, companies predict a 2.3% gain in sales for fiscal 2024, according to the September edition of the Tankan—up 0.5 point from the June survey. They see pretax profit falling by 5.7%, but this is a 2-point improvement from June.
The biggest challenge is the shortage of workers. In the new Tankan, the percentage of large manufacturers reporting “insufficient employment” surpasses those reporting “excessive employment” by 19 points. The metric worsened by 1 point since the June survey.
Among large nonmanufacturers, “insufficient employment” exceeds “excessive employment” by 39 points, which is unchanged from the June survey. This shows that Japan is experiencing the worst labor shortage since 1991.
The Miyako Hotel Kyoto Hachijo reports being roughly 20% understaffed, even though occupancy rates and per-room spending both rose about 10% on the year in September. The Kyoto hotel covers gaps in housekeeping and restaurant staffing by temporarily reassigning people from other posts.
The labor crunch is holding back businesses that are eager to grow. Large manufacturers had planned to increase capital spending by 20% in fiscal 2023, according to the September 2023 Tankan survey, but later reported an actual increase of only about 11%. A new Marriott International luxury hotel in the tourist city of Tottori has repeatedly pushed back its opening date over a lack of workers and higher materials costs.
“It’s too early to say that individual consumption is on the rise,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities. “The strong performance of lodging services is due largely to the effect of inbound demand.”
Japanese businesses large and small are set to continue sweetening compensation packages to resolve worker shortages. Suntory Holdings president Takeshi Niinami has said the group intends to offer a 7% pay raise for 2025, in line with the 2024 raise.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.