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Japan prices to keep rising in July, output rebound eyed

A passerby walks in front of a retail shop displaying sale advertisement in Tokyo March 27, 2009. REUTERS/Issei Kato
A passerby walks in front of a retail shop displaying sale advertisement in Tokyo March 27, 2009. REUTERS/Issei Kato

By Leika Kihara

TOKYO (Reuters) - Japan's core consumer inflation rate is forecast to have hit its highest in nearly five years in July and factory output is seen rebounding, a Reuters poll shows, suggesting that government and central bank efforts to end deflation are making some progress.

Household spending is expected to have edged up and the jobless rate held steady at its lowest in nearly five years, according to the poll, as growing optimism prompts companies to pay higher summer bonuses and increase hiring.

Friday's slew of data for July could strengthen the case for the government to go ahead with a scheduled two-stage hike in the sales tax from next year, despite some concerns that it may weaken the economic recovery before it is fully entrenched.

Most analysts say the tax increase is needed to rein in Japan's burgeoning public debt, although some concede there is merit to the argument the rise should be more moderate or even delayed.

"Many companies are holding off on capital spending now because they want to see what happens to the economy after the tax hike," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

The government will hold meetings about the tax hikes with executives and academics through this week. Prime Minister Shinzo Abe is expected to make a decision before an APEC summit on October 7, Economics Minister Akira Amari said on Sunday.

BOJ GOAL STILL DISTANT

The nationwide core consumer price index, which excludes volatile fresh food prices but includes fuel costs, is forecast to have risen 0.6 percent in July from a year earlier.

That would follow a 0.4 percent increase in June and mark the biggest increase since a 1.0 percent gain in November 2008.

The rise would be driven mostly by gasoline and electricity prices, although analysts say robust consumer spending means more firms are more willing to pass on the rising costs.

That bodes well for the Bank of Japan's battle to end deflation, although analysts still doubt whether inflation will accelerate enough to meet the central bank's target of a 2 percent rate in two years.

"Consumer inflation will probably hit 1 percent early next year. After that, the tax hikes may slow the pace of price rises by weighing on the economy," Minami said.

Factory output is forecast to have risen 3.7 percent in July after falling 3.1 percent in June, the poll showed, as domestic demand makes up for some of the weakness in shipments to China and other emerging economies.

The jobless rate is set to stay flat at 3.9 percent in July, while household spending will edge up 0.3 percent from a year earlier, partly as the summer heat boosts sales of air conditioners, according to the poll.

Japan's economy grew an annualized 2.6 percent in April-June to mark the third straight quarter of expansion as a pick-up in exports added to sustained strength in personal consumption, although the growth was slower than market expectations.

(Editing by John Mair)

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