February 28, 2014 / 1:27 AM / 4 years ago

Japan factory output jumps ahead of tax hike, outlook murky

TOKYO (Reuters) - Japan’s factory output rose in January at the fastest pace in more than two years and core inflation hovered near a five-year high, comforting signs for an economy expected to take a hit from a sales tax hike scheduled for April.

Pedestrians walk under Japan's national flags outside the Tokyo Station February 17, 2014. REUTERS/Yuya Shino

Labour demand continued to improve and household spending rose more than expected, providing hope that domestic demand could underwrite a recovery after lacklustre growth in the fourth quarter of last year.

The upbeat data showed the economy started the year strongly as shoppers brought forward purchases before the tax hike, but there are concerns that more stimulus would be needed later in the year to support growth as consumer spending is expected to sag.

“I‘m not that confident about the economy after the sales tax hike,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.

“Consumer spending will not be as strong as it is now. There are a lot of uncertainties about exports. Once the BOJ realises that consumer prices are not accelerating, it will start to debate other measures.”

After decades of sluggish growth, the world’s third-largest economy shifted into higher gear over the last year after Prime Minister Shinzo Abe launched an aggressive cocktail of monetary and fiscal stimulus policies.

However, markets are starting to worry about the durability of the rebound, especially as exports have failed to substantially perk up while business investment and wages growth have trailed expectations.

The scheduled sales tax hike to 8 percent from 5 percent in April has added to the uncertainty, although policy makers have said that they are prepared to look past a temporary dip in activity.

Japan’s industrial output rose 4.0 percent in January, suggesting that robust domestic demand is underpinning the economy as consumers rush to beat the national sales tax hike.

The rise was more than the median forecast for a 3.0 percent as companies ramp up production of cars and consumer appliances. It was also the fastest increase since output rose 4.2 percent in June 2011.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 1.3 percent in February but decrease 3.2 percent in March, data showed on Friday.

Japan’s core consumer price index (CPI), which excludes fresh food prices but includes oil products, rose 1.3 percent year-on-year in January, more than the median estimate for a 1.2 percent annual increase.

That matched a 1.3 percent annual increase in December - the fastest in more than five years.

The central bank maintained its massive monetary stimulus at last week’s policy meeting, aiming to meet a 2 percent price goal around early 2015, which is seen by many analysts as overly ambitious.

Analysts expect that inflation will struggle to pick up pace in the coming months as the effects of a weak yen on imported goods taper off. There are also worries private consumption could lose steam after the sales tax is raised.

Japan’s jobless rate was unchanged at a six-year low of 3.7 percent in January.

Job availability as measured by the jobs-to-applicants ratio edged up to 1.04, meaning more than one job is available per job seeker. The ratio matched the median estimate and hit the highest since August 2007, underlying the strength of the job market.

Japanese household spending rose 1.1 percent in the year to January, blowing past the median estimate for a 0.2 percent increase.

That marked a fifth straight month of annual gains and an acceleration from a 0.7 percent annual increase in December as consumers spent more on clothes, cars and domestic travel.

A Reuters poll last week showed the BOJ is expected to ease policy further by this summer to help boost the economy as the effects from Prime Minister Shinzo Abe’s stimulus strategy begin to wane.

Editing by Shri Navaratnam

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