Japan's factory output jumps, inflation up but anxiety lingers

Thu Feb 27, 2014 11:43pm EST
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By Tetsushi Kajimoto and Stanley White

TOKYO (Reuters) - Japan's factory output rose in January at the fastest pace in more than two years and core inflation hovered at five-year highs, suggesting the economy has enough momentum to withstand an expected hit from a sales tax hike scheduled for April.

Other data were equally upbeat, with labor demand improving and household spending rising in a sign the world's third-biggest economy is on course to shaking off two decades of stagnation even as it steers through some speed bumps.

Domestic consumption is seen supporting activity as shoppers brought forward purchases, but the recent debate in markets has centered around an expected chill in demand after the tax hike and the risks that it may take the wind out of the government's growth strategy.

"I'm not that confident about the economy after the sales tax hike," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.

"Consumer spending will not be as strong as it is now. There are a lot of uncertainties about exports. Once the BOJ realizes that consumer prices are not accelerating, it will start to debate other measures."

After decades of sluggish growth, the economy shifted into higher gear over the last year after Prime Minister Shinzo Abe launched an aggressive cocktail of monetary and fiscal stimulus policies.

However, markets are starting to worry about the durability of the rebound, especially as exports have failed to substantially perk up while business investment and wages growth have trailed expectations.

The planned sales tax hike to 8 percent from 5 percent has added to the uncertainty, although policy makers have said that they are prepared to look past a temporary dip in activity.   Continued...

A man works inside a factory in Tokyo August 12, 2013. REUTERS/Yuya Shino