Japan Recovery Strengthened in May in Boost for Abe: Economy

Japan’s economy strengthened in May as factory output rose the most since December 2011, retail sales climbed and consumer prices halted a six-month slide, bolstering Prime Minister Shinzo Abe’s push to end deflation.

Consumer prices excluding fresh food were unchanged from a year before as a weakening yen sent utility costs up at the fastest pace in almost five years. Prices excluding fresh food and energy fell 0.4 percent in May from a year earlier, the statistics bureau in Tokyo reported today. Industrial production advanced 2 percent from April driven by demand from power companies. Retail sales gained 1.5 percent from the previous month.

The data offer Abe evidence that his reflationary strategy is paying off as he campaigns to strengthen his political position before next month’s upper house election. They may also ease pressure on Bank of Japan Governor Haruhiko Kuroda to add monetary stimulus after a sell-off in stocks.

“The policies of the government and BOJ are working in terms of reflating the economy,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who formerly worked at Goldman Sachs Group Inc. At the same time, “for Japan to recover from two decades of deflation, it will require a few years of good economic performance.”

Rising Stocks

The Nikkei 225 Stock Average rose 3.5 percent today, paring its loss over the past month to 4.4 percent. Japan’s equities slumped from a five-year high reached May 22 amid concern that the U.S. Federal Reserve will pare back its liquidity injections and that Abe is waiting until after the election to pursue structural reforms. The yen was 0.5 percent lower at 98.77 per dollar at 3:47 p.m. in Tokyo.

The biggest contributors to the May production data included parts and accessories for steam turbines as well as boiler parts used in thermal power plants, and water tube boilers used by electric power companies, according to the Trade Ministry. Retail sales rose on increased sales of clothing, fuel and medicines, the ministry said.

Victory for the Liberal Democratic Party-led coalition in a national ballot for the upper chamber of the Diet expected on July 21 would end the split parliament that has hampered decision-making. A survey published by the Nikkei newspaper this week found 47 percent of respondents planned to vote for the LDP in the proportional representation section of the election.

Liking Abenomics

Fifty-five percent of respondents in the survey approved of Abe’s economic policies, and 66 percent supported the cabinet. The paper surveyed 918 people by phone between June 21 and June 23 and did not give a margin of error.

Some food retailers are offering more expensive items to lure customers. McDonald’s Holdings Co. Japan Ltd. this week started selling its most expensive hamburger ever, a special summer item priced at 570 yen ($5.77).

Meantime, some companies are expressing concern about rising prices. The Japan Iron and Steel Federation, with nine other industrial organizations, submitted a request to Minister for Trade and Industry Toshimitsu Motegi for tax breaks and financial assistance to cushion the impact of higher utility bills pushed up by nuclear-plant shutdowns and a weaker currency.

Sentiment Improving

The Tankan survey of Japan’s largest manufacturers may show positive sentiment for the first time since September 2011, according to the median forecast of 22 economists before the report due July 1.

“We don’t know yet if this will be a trend for inflation. It’s too early to say Japan is seeing light at the tunnel for beating deflation,” Kohei Okazaki, an economist at Nomura Securities Co. said. “The key is wage growth.”

The fading effect of a large increase in TV prices last year may have contributed to today’s inflation figures, which also reflect a decline in energy prices last May, Okazaki said.

Elsewhere in Asia today, South Korea reported industrial production unexpectedly fell in May from the previous month. Thailand’s current account deficit last month is forecast to narrow to $2 billion from a record in April, a Bloomberg survey showed.

In Europe, Italian business confidence in June is expected to rise for a second month, while German consumer price gains in June are forecast to quicken from a year earlier. U.K. house prices rose for a second month in June as mortgage availability improved.

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