Japan sees rises in inflation, factory output, as stimulus-led recovery gains momentum

TOKYO – Japan’s consumer price index rose 0.4 per cent in 2013, the first increase in five years, in further evidence the recovery in the world’s third-largest economy is gaining momentum.

A flood of cash from central bank asset purchases and other government spending has underpinned demand, helping to boost growth despite a weakening in Japan’s trade balance.

A tax hike due to take effect on April 1 is expected to dent growth in coming months, however, as consumers tighten their belts to compensate.

Much of the increase in prices stems from rising costs for imports of food and costly crude oil and natural gas. Excluding those factors, prices rose 0.2 per cent in 2013. The core consumer price index, excluding just fresh food, rose 1.3 per cent in December.

The data released Friday show factory output rose a seasonally adjusted 1.1 per cent in December from the month before, driving by strong demand for machinery, electronics, computer components and metals. The annual increase was 7.3 per cent, the Ministry of Economy, Trade and Industry reported.

The jobless rate fell to 3.7 per cent, its lowest level in six years.

After a year in office, Prime Minister Shinzo Abe is facing pressure to deliver on promised economic and administrative reforms to help sustain the recovery. Getting companies to raise wages to help offset the blow to demand from rising prices and taxes will be critical to the success of his strategy for reviving the economy after more than two decades of stagnation.

“The hope is that a tightening labour market will drive up wages, which will in turn help sustain a moderate rate of consumer price inflation in Japan,” said Chris Williamson of Markit Economic Research, whose survey on the manufacturing outlook for Japan in January showed the highest level of orders in eight years.

He noted, however, that “other than rising import costs, inflationary pressures remain relatively subdued.”

Friday’s data show progress toward meeting the government and central bank’s target of achieving an inflation rate of about 2 per cent by 2015. Abe is betting that worries over future higher prices will provide a strong enough push to get the economy into what he calls a “virtuous cycle” of rising prices, output and investment.

Japan struggled with deflation for years, as sluggish demand and a declining population led companies to rein in investment and cut jobs and wages.

So far, there are scant signs that has changed. On average, wages continued to fall in 2013, with any one-off increases coming in the form of bonuses and increased hiring of part-time and temporary workers.

In parliamentary debate Friday, Abe acknowledged the need to wean the economy from reliance on stimulus spending, especially given Japan’s huge public debt, which is more than twice the size of its economy.

“We can’t rely forever on government spending,” he said. “Demand from the private sector has to support growth.”