Japan core inflation seen rising, July data may endorse tax hike

A man works at a factory at Keihin industrial zone in Kawasaki, south of Tokyo, June 28, 2013. -- FILE PHOTO: REUTERS
A man works at a factory at Keihin industrial zone in Kawasaki, south of Tokyo, June 28, 2013. -- FILE PHOTO: REUTERS

TOKYO (REUTERS) - Japan's core consumer inflation rate is expected 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 Mr Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

Under a multi-party agreement last year, the sales tax is to rise to 8 per cent from 5 per cent next April and to 10 per cent in October 2015 to pay for rising welfare costs in the ageing society.

The government will conclude a week-long hearing with economists, business leaders and consumer advocates on Saturday that may help determine how Prime Minister Shinzo Abe will proceed with a planned increase in the sales tax. He is expected to make a decision before an Asia-Pacific Economic Cooperation (Apec) summit on October 7.

A majority of the panel's participants so far has advocated going ahead with the plan, pointing to the need to rein in Japan's ballooning spending and fiscal debt.


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

That would follow a 0.4 per cent increase in June and mark the biggest increase since a 1.0 per cent 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 willing to pass on the rising costs, a move that bodes well for Bank of Japan's battle to end deflation.

Bank of Japan Deputy Governor Kikuo Iwata on Wednesday reiterated the central bank's goal of achieving 2 per cent inflation as soon as possible with a two-year time frame in mind.

Analysts still doubt whether inflation will accelerate enough to meet that target in two years.

"Consumer inflation will probably hit 1 per cent 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 per cent in July after falling 3.1 per cent 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 per cent in July, while household spending will edge up 0.3 per cent from a year earlier, partly as the summer heat boosts sales of air conditioners, according to the poll.

Japan's economy grew an annualised 2.6 per cent 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.

A document obtained by Reuters recently showed Japan expects to spend a record US$257 billion (S$352 billion) to service its debt during the next fiscal year, an amount nearly as large as the gross domestic product of Singapore.

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