Is Japan's consumption set for its first decline in more than two years? BOJ preemptively "inoculates": under population shrinkage, weak aggregate deteriorating demand, and a December rate hike may not necessarily be affected

The Bank of Japan said that due to the continued shrinking of the population, it is difficult for Japan's overall consumption to achieve strong growth, but this also means that the sluggishness of aggregate consumption itself does not necessarily represent a weakening of household demand. In its full quarterly outlook report released on Monday, the Bank of Japan said: "From a demographic perspective, one point that should be noted is that, first of all, it is difficult to expect total private consumption to achieve strong growth as a trend." "Specifically, the pace of Japan's population decline has been accelerating since around 2020." The Ministry of Internal Affairs and Communications reported in September that Japan's population in 2025 had fallen by 2.5% compared with five years earlier. This is the fastest decline since records began in 1920, about three times the pace of the decline in 2020. Private consumption accounts for about half of Japan's economy, so its strength is a key consideration for the Bank of Japan as it weighs another rate hike, with the market widely expecting the central bank to act in December. After raising rates in September last month, the policy board led by Governor Kazuo Ueda kept rates unchanged last week. Institutions including BNP Paribas and Dai-ichi Life Research Institute expect the third-quarter GDP data scheduled for release on November 16 to show a decline in consumer spending. Although this would be the first decline in more than two years, the Bank of Japan's analysis suggests that this decline alone may not necessarily be enough to indicate that the economy is weak enough to hinder further rate hikes. Thanks to a sustained recovery, the size of Japan's economy has expanded to a record high, but overall consumer spending remains below pre-pandemic levels. Estimates released by the Bank of Japan on Monday help explain this divergence: per capita consumption at the start of this year was about 4% higher than in 2015, while total consumption was almost flat. These data highlight that when assessing the economy, it is becoming increasingly important for policymakers to distinguish between weakness caused by deteriorating household demand and a downturn caused merely by population shrinkage. The Bank of Japan will release its next policy decision on December 18.