Consumer price data gives Japan a boost in battle against deflation

TOKYO (AFP) - Japan logged its first annual rise in consumer prices for five years in 2013, official data showed Friday, a boost for the government in its battle against stubborn deflation.

But surging post-Fukushima energy costs largely drove the rise, underlining the challenge still facing Prime Minister Shinzo Abe, who is bidding to reverse years of falling prices and kickstart growth in the world's third-largest economy.

Key to that drive is the Bank of Japan's ambitious 2.0 per cent inflation target, the cornerstone of efforts to turn around an economy beset by weak consumer spending and tepid business investment.

The broad consumer price index, which measures a basket of everyday goods but excludes volatile fresh food costs, rose 0.4 per cent last year, the first annual increase since a 1.5 per cent rise in 2008.

In December alone, prices were up 1.3 per cent year-on-year.

In another positive sign, separate data showed that spending by Japan's households was up last month as the nation's factories expanded their output, while the unemployment rate hit a six-year low.

But the upbeat headline for Friday's data was tempered by the fact that all-important consumer prices were largely driven up by higher fuel bills rather than surging demand for everyday goods. Prices excluding both food and energy slipped 0.2 per cent.

Households spent more on their electricity bills, as Japan's energy costs soared following the 2011 Fukushima atomic disaster, which forced the shutdown of the nation's nuclear reactors.

Since then, the country has been importing fossil fuels to plug the energy gap, a pricey option that has become even more expensive as the yen sharply weakened following the BoJ's unprecedented monetary easing drive.

The currency has lost about a quarter of its value against the dollar since late 2012 owing to Mr Abe's bid to drive growth through government spending and huge central bank monetary easing.

The yen's decline inflated profits at exporters such as Sony and Toyota, and kicked off a stock-market rally that saw the Nikkei index surge 57 per cent last year, its best run in over four decades.

The weaker currency also gives exporters more flexibility to lower prices on the televisions, cars and computer chips that they sell abroad.

But after suffering through years of a record-high yen, most firms have not slashed overseas prices, and the now-weaker unit has jacked up Japan's energy costs.

At home, many firms have yet to move on Mr Abe's call to push up wages as Japan gets set for an April sales tax hike, seen as crucial to bringing down an eye-watering national debt but a rise that some fear will derail Japan's budding recovery.

Spending on cars and appliances surged in December as consumers seek out big-ticket purchases ahead of the tax rise.

But a recent poll by Kyodo News showed nearly three-quarters of Japanese people felt no effect from the economic growth drive, and critics say Mr Abe must follow through on structural reforms to the economy, including shaking up labour markets and signing free-trade deals.

In other data released Friday, Japan's factory output in December rose 1.1 per cent on-month, reversing a fall in November, while household spending rose 0.7 per cent and unemployment hit a multi-year low of 3.7 per cent.

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