Rising prices are hurting Japanese consumers, especially young people, and around 64 trillion yen ($498 billion) in excess savings accumulated over the COVID-19 pandemic years have done little to support consumption, the Cabinet Office said Friday.

The recent bout of inflation, accelerating twice as fast as the Bank of Japan's 2 percent target, is largely due to higher costs, the office said in its annual economic report, adding that the time is not ripe to change accommodative monetary policy as support from robust wage growth is still lacking.

Inflation at home and recession fears about the global economy are casting a pall over the world's third-largest economy, which unexpectedly shrank in the July-September quarter of 2022.

The economy has so far been supported by a recovery in the services sector hit hard by the pandemic but the office warned that private consumption, accounting for more than half of the economy, may take a lagged hit from the recent worsening of household sentiment.

Spending on goods and services among people aged 34 or younger has been on the decline as a trend but its fall has been sharp during the pandemic, which began in 2020, the office said. On top of rising prices, the drop may reflect "growing concerns about future pension benefits and the sustainability of the nation's social security system due to the aging of its society."

The corresponding figures for those aged between 35 and 64 as well as those aged 65 and older have also been trending downward, the report said.

"Extra savings have been increasing, albeit at a slower pace than before. Even in the current phase of rising prices, it cannot be observed that (people) have been dipping into their savings," the document said. "Therefore, any boost to consumption is not clear at this point."

Japan has lagged behind the United States and Europe in recovering from the COVID-19 economic fallout but expectations have grown that pent-up demand, helped by excess savings accumulated amid antivirus curbs, will support the economy. In the United States, for instance, excess savings have prompted consumers to step up spending, the report said.

The Cabinet Office releases a report analyzing economic conditions annually, with the 2022-2023 edition emphasizing inflation as Japan battles with consumer prices at their highest level in four decades.

Japanese companies have been raising prices of everyday goods to reflect higher raw material costs, amplified by the yen's historic depreciation against the U.S. dollar. But economists say Japanese firms have yet to fully pass increased costs to consumers for fear of scaring them off.

In 2022, the prices of goods traded between companies jumped a record 9.7 percent from a year earlier. This compares with a 2.3 percent gain in core consumer prices, excluding volatile fresh food items, in the same year.

The BOJ expects inflationary pressure to ease this year and has reiterated its commitment to keeping ultralow rates to spur wage growth.

Companies need to pass on costs and create more added value that would enable more pay hikes for employees, the report said. "We have not reached a point where wage growth is supporting price hikes. At this stage, conditions have not been met for the current accommodative financial conditions to change."

The yen's precipitous fall last year came as the U.S. Federal Reserve aggressively raised interest rates, with financial markets expecting the monetary policies of the two nations to further diverge. Alarmed by the rapid depreciation, Japanese authorities intervened on multiple occasions to stop it.

The Japanese currency fell around 19 percent relative to the dollar last year, according to Finance Ministry data.

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