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Friday, November 28, 2003

Japan's Conflicting Data

I think it is far too early to be calling this battle over. In fact my opinion is quite the contrary: things are likely to get worse, and if the problem is an ageing society, get worse without getting better. I more or less agree with MS's Takehiro Saito, this is a cyclical spike, and almost certainly not sustainable. As for the rest: you see what you want to see.

An end to Japan's battle against deflation came into sight on Friday as the country's consumer price index increased for the first time in four years, though the optimism was tempered by other data showing unemployment rose and industrial output increased less than expected.

The CPI's rise nonetheless supported bullishness on Japan's economy, which is experiencing a cyclical recovery driven largely by growth in exports and domestic corporate spending. But other new data cast doubt on the strength of the recovery's momentum and the extent to which its knock-on effects are being felt in the labour market.

The nationwide CPI rose 0.1 per cent in October from a year ago, and coincided with the first increase in retail sales for 31 months. Together the figures endorsed the view that after more than seven years of deflation, downward pressure on prices was easing.

However, analysts warned against calling an end to deflation too soon as prices last month were lifted by temporary factors such as a higher rice prices stemming from a poor harvest, a an increase in the tobacco tax, and a rise in patients' share of medical costs.

Takehiro Sato, economist at Morgan Stanley, said: "From a cyclical point of view deflation is fading, but I'm not sure about the sustainability of this increase in the CPI."

He forecasts that when special factors are stripped out the price index will not reach positive territory until at least the end of the 2005 fiscal year.

Separate data released on Friday showed industrial production rose 0.8 per cent in October following a 3.8 per cent gain the previous month, but fell well short of consensus forecasts.

Mr Sato said it was a sign of companies still lacking confidence. "Inventories dropped which means demand is strong, but production is not increasing so that suggests companies are cautious."

The latest labour market data showed unemployment rose 0.1 per cent to 5.2 per cent in October, moving away from a two-year low of 5.1 per cent and back toward an all-time high of 5.5 per cent hit in January.

Analysts took the figures as confirmation that the cyclical recovery has still not yet created labour conditions likely to give consumers the confidence to step up spending. They have contributed little to gross domestic product growth so far this year.
Source: Financial Times

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