TOKYO—An odd mix of vigorous job growth and lackluster consumption continued to haunt Japan’s economy this summer, new government data showed on Tuesday, undermining Prime Minister Shinzo Abe’s efforts to get his revival plan back on track.
The unemployment rate dipped to 3% in July, reflecting the strongest labor market since 1995. But household spending in the same month slipped 0.5% from the year-earlier level, the fifth consecutive month of decrease, in a country where consumer spending accounts for about 60% of the economy.
The data reflects a paradox for the world’s third-biggest economy. In most countries, consumers feel more confident about the future and spend more when companies hire more workers. In Japan, that hasn’t happened. The dichotomy has vexed Mr. Abe, who frequently mentions robust hiring as one of his main accomplishments. Yet he hasn’t succeeded in boosting conservative spending habits through monetary and fiscal stimulus.
Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute, said the nation had a “sentiment” problem. The collective income of Japan’s labor force is rising, but consumers don’t feel like opening their wallets because of fears about the future, he said.
Mr. Abe has twice put off an increase in the national sales tax to 10% from the current 8%, but it still looms in 2019, representing an additional consumer burden of ¥5 trillion, or roughly $50 billion, annually. The tax is intended in part to help shore up Japan’s beleaguered social security system.
Consumer stinginess is evident in a measure of money actually spent divided by disposable income. That number, called the propensity to consume, came to 64.6% in July, down from 66.7% a year earlier, according to Tuesday’s data. The reading was the lowest since 2006 for the month of July.
“The quickest way to stimulate spending would be lessening the sales tax … or suspend the planned increase,” but that would be difficult politically, Mr. Nagahama said.
The Bank of Japan’s introduction of negative interest rates early this year hasn’t lifted consumer sentiment. “It doesn’t matter how low the interest rate has become,” said Takahiro Doi, a worker in his early 40s at a logistics company. “I must save. I don’t expect the economy to grow or companies to raise salaries even if I spend more.”
In early August, Mr. Abe’s cabinet approved a stimulus package that includes ¥7.5 trillion in new spending to rejuvenate the economy, but its main pillar is infrastructure spending rather than measures to get households to spend.
Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance, said the problem lies in Japan’s hiring practices.
Even though jobs figures have improved, companies have maintained their practice of hiring more nonregular workers than regular employees to keep operational costs under control, he said. That has kept wage growth per person too modest to jump-start spending.
Changing the attitude of corporate Japan would require raising the nation’s potential economic growth rate from the current near-zero levels, but that can’t be done quickly. “Although the economy is close to full employment, I don’t think we should expect wage growth to accelerate,” Mr. Kodama said.
Mr. Abe has said he wants to eliminate the word “nonregular worker” from the lexicon, hoping to make wage-earners more confident about job stability and more willing to spend.
