Japan Retail Sales Rise at Fastest Pace Since 1997 (Update2)

March 29 (Bloomberg) -- Japan’s retail sales gained at the fastest pace in more than a decade in February, signaling that a drop in the unemployment rate is feeding through to higher household spending.

Sales rose 4.2 percent from a year earlier, the Trade Ministry said today in Tokyo, the biggest monthly jump since 1997. The median estimate of 12 economists surveyed was for a 1.6 percent climb.

An export recovery and stimulus spending have started to create jobs and support wages, improving prospects for companies including Dydo Drinco Inc. and Seven & I Holdings Co. The sales rebound has yet to end Japan’s battle against deflation, with consumer prices failing to rise in any month since December 2008, pressing officials to maintain support for the expansion.

“Today’s report was much stronger than expectations,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “Because of the export rebound, profits are recovering, and that’s helping support wages and jobs. Consumer spending won’t make big drops ahead even when the stimulus starts to fade.”

The yen traded at 92.65 per dollar at 11:09 a.m. in Tokyo from 92.44 before the report was published. The Topix Retail Trade Index rose 0.5 percent, outperforming the broader Topix Index, which fell 0.3 percent.

The last time retail sales surged this much was when they advanced 12.4 percent in March 1997, a month before Japan raised the consumption tax to 5 percent from 3 percent. Higher demand for energy-efficient vehicles and flat-screen televisions bolstered sales last month, the government said. Clothing sales advanced 8.4 percent.

Improving Market

Seven & I, Japan’s largest retailer, gained 3.6 percent in Tokyo trading today after Morgan Stanley raised its rating on the stock to “overweight.” The operator of 7-Eleven convenience stores and Ito-Yokado supermarkets will benefit from a slower decline in consumer prices and an improving labor market, Morgan Stanley said in a report published March 26.

From a month earlier, retail sales unexpectedly climbed 0.9 percent, the second consecutive gain. None of the eight economists surveyed by Bloomberg News predicted an increase, and their median estimate was for a 1.2 percent drop.

Sales in the month ended March 20 at Dydo Drinco, a beverage maker, gained 7.2 percent from a year earlier.

Consumer confidence advanced for a second month in February, led by sentiment about employment, a sign households may boost outlays in coming months as fears of being fired recede. Higher sentiment may help offset the unwinding of emergency government spending programs that gave consumers incentives to buy durable goods.

‘Lasting Positive Impact’

“Even though the boost will fade, you’re still going to get a lasting positive impact” from the stimulus, Julian Jessop, chief international economist at Capital Economics Ltd. in London, said before the report.

Japan’s economy added the most jobs in more than three decades in January and workers’ pay declined at the slowest pace in 19 months. A report tomorrow will show the unemployment rate probably held at a 10-month low of 4.9 percent in February, according to the median forecast of 23 economists.

Prime Minister Yukio Hatoyama won approval for his record 92.3 trillion yen ($996 billion) budget last week, securing funding to implement cornerstone election pledges to give households childcare handouts and provide free tuition at public high schools ahead of a July upper house election.

Cheaper Prices

Not all analysts are convinced the consumer outlays can be sustained. Households continue to demand lower prices for their products, threatening to erode the profit margins of retailers.

“Consumer spending can’t increase regardless of jobs and incomes, which appear to have stopped declining but have failed to gained momentum,” said Hiroshi Watanabe, an economist at Daiwa Institute of Research in Tokyo. “The economy will only improve at a very moderate pace.”

Daisyo Corp., a Japanese style pub operator, reversed its full-year forecast to a net loss of 270 million yen from a 500 million yen profit, saying that an intensifying pricing war has made it difficult to boost sales.

Richard Jerram, chief Asia economist at Macquarie Securities Ltd. in Tokyo, says a better labor market won’t boost the economy enough to end the country’s bout of deflation. Consumer prices excluding fresh food, the Bank of Japan’s preferred gauge of inflation, dropped 1.2 percent in February, prompting Finance Minister Naoto Kan to say that “more efforts” are needed to beat deflation.

The central bank doubled a credit program to commercial lenders this month to 20 trillion yen.

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net