Industrial production snapped two quarters of decline in December, signaling the economy may have limped out of recession.
Output rose 1.8 percent in the three months through December from the third quarter, the Ministry of Economy, Trade and Industry said Friday.
While household spending fell and inflation slowed in December, the labor market continued to tighten, with the ratio of jobs to applicants rising to the highest in more than two decades and the official unemployment rate falling to the lowest since August 1997.
The improvement in the job market reduces immediate pressure on Bank of Japan Gov. Haruhiko Kuroda to add monetary stimulus as tumbling oil prices challenge his effort to stoke faster inflation. Output for December was lower than forecast by economists, indicating the recovery remains weak.
“Households are still in saving mode as their real income drops after the consumption tax increase, and production indicates companies are still very cautious,” said Takeshi Minami, an economist at Norinchukin Research Institute. “The government is unlikely to compile another fiscal stimulus package with the economy recovering, but they will have to work on promoting capital spending and wage increases.”
The midyear recession that followed the consumption tax hike last April was a setback for “Abenomics,” Prime Minister Shinzo Abe’s reflationary policies aimed at pulling Japan out of two decades of stagnation.
The heaviest debt burden in the world has limited Abe’s ability to rely on traditional public spending, with his Cabinet approving a ¥3.5 trillion stimulus package that relies on no new bond issuance. Instead, the BOJ is spearheading efforts to stoke inflation with unprecedented monetary stimulus that gobbles up government bonds, driving down the yen and leading to record profits for many big exporters, including Toyota Motor Corp.
The challenge for Abe is to ensure companies deploy some of their record cash holdings and boost pay to help households cope with rising living costs resulting from the tax hike and nascent inflation. Wages adjusted for inflation fell for a 17th straight month in November, according to the labor ministry.
The outlook, however, is uncertain, with a lot of unease among consumers, Finance Minister Taro Aso said at a news conference.
“Falling oil, low interest rates and a weak yen aren’t bad for the economy. In the long-term, it isn’t bad,” Aso said.
The ratio of jobs to applicants rose to 1.15 from 1.12 in November, while unemployment dropped to 3.4 percent from 3.5 percent.
A 1 percent increase in production in December from the previous month capped the strongest gain since 2010 last year, with annual output climbing 2.1 percent. The median estimate for the December output was a 1.2 percent increase, according to a Bloomberg survey.
Still, slowing inflation underscores the task for Kuroda.
Consumer prices excluding fresh food rose 2.5 percent from a year earlier, less than the median projection of 2.6 percent in a Bloomberg survey. Stripped of the effect of the sales tax hike, core inflation — the BOJ’s key measure — was 0.5 percent, below its 2 percent target.
Kuroda said Thursday inflation is likely to slow in the coming months due to falling oil prices. But cheaper oil is a big plus for the economy, he said, sticking to a projection that consumer price gains will reach the BOJ’s target in or around the fiscal year starting in April.
HSBC Holdings economist Izumi Devalier sees Japan slipping back into deflation in March as lower oil prices overwhelm the impact of the weaker yen on consumer prices.
Shifts toward robust wage increases and rising inflation expectations are likely to be much more gradual than the BOJ expects, Devalier said in a research note.
“The downside risks to the Policy Board’s optimistic price scenario loom large,” she said, predicting additional monetary stimulus as early as April.
The median estimate of core inflation among the BOJ’s nine Policy Board members was cut to 1 percent for next fiscal year, the bank said Jan. 21. Just three months earlier the median was 1.7 percent.
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