Japan Limps Out of Recession With December Production Gain

Japan’s economy probably limped out of its fourth recession since 2008 last quarter, with a report Friday showing industrial production eking out a gain in December after a slide the previous month.

Output rose 1.8 percent in the three months through December from the third quarter, the trade ministry said. While household spending fell and inflation slowed in December, the labor market continued to tighten, with the ratio of jobs to applicants rising to the highest in more than two decades and the unemployment rate falling to the lowest since August 1997.

The improving job market reduces immediate pressure on central bank Governor Haruhiko Kuroda to add monetary stimulus as tumbling oil prices challenge efforts to stoke faster inflation. The government has signaled patience, with Economy Minister Akira Amari saying earlier this week that nobody has committed to a strict schedule to meet the price target.

“Households are still in saving mode as their real income drops after the sales-tax increase, and production indicates companies are still very cautious,” said Takeshi Minami, an economist at Norinchukin Research Institute. “The government is unlikely to compile another fiscal stimulus package with the economy recovering, but they will have to work on promoting capital spending and wage increases.”

The Topix index of shares closed 0.1 percent higher Friday while the yen gained 0.4 percent to 117.87 per dollar at 4:36 p.m. local time. The yield on the 10-year Japanese government bond rose 1 basis point to 0.275 percent.

Debt Burden

The midyear recession that followed a sales-tax increase last April was a setback for Abenomics, Prime Minister Shinzo Abe’s reflationary policies aimed at pulling Japan out of two decades of stagnation.

The heaviest debt burden in the world has limited Abe’s ability to use public spending, with his Cabinet approving a 3.5 trillion stimulus package that relied on no new bond issuance. Instead, Bank of Japan is spearheading efforts to stoke inflation with unprecedented monetary stimulus that drove down the yen, leading to record profits for many big exporters including Toyota Motor Corp.

The challenge for Abe is to ensure companies deploy some of their record cash holdings and boost pay to help households cope with rising living costs resulting from the higher sales tax and nascent inflation. Wages adjusted for inflation fell for a 17th straight month in November, according to the labor ministry.

Aso Upbeat

The economy’s outlook is uncertain, with a lot of unease among consumers, Finance Minister Taro Aso said at a press conference. “Falling oil, low interest rates and a weak yen aren’t bad for the economy. In the long-term, it isn’t bad,” Aso said.

The ratio of jobs to applicants rose to 1.15, from 1.12 in November, while the unemployment rate dropped to 3.4 percent, from 3.5 percent.

A 1 percent increase in production in December from the previous month capped the strongest gain since 2010 last year, with annual output climbing 2.1 percent. The monthly figure trailed the median estimate of 1.2 percent in a survey of economists by Bloomberg News.

Still, slowing inflation underscore the task for Kuroda.

Consumer prices excluding fresh food rose 2.5 percent from a year earlier, less than the median projection of 2.6 percent in a Bloomberg survey. Stripped of the effect of sales-tax increase last April, core inflation -- the Bank of Japan’s key measure -- was 0.5 percent, below its 2 percent target.

Kuroda’s Challenge

Kuroda said on Thursday that inflation is likely to slow in the coming months due to falling oil prices. But cheaper oil is a big plus for the economy, he said, sticking to a projection that consumer price gains will reach the BOJ’s target in or around the fiscal year starting in April.

HSBC Holdings Plc economist Izumi Devalier sees Japan slipping back into deflation in March, as lower oil prices overwhelm the impact of a weaker yen on consumer prices.

Shifts toward robust wage increases and rising inflation expectations are likely to be much more gradual than the BOJ expects, Devalier said a research note.

“The downside risks to the policy board’s optimistic price scenario loom large,” she said, predicting additional monetary stimulus as early as April.

The median estimate of core inflation among the BOJ’s nine policy board members was cut to 1 percent for next fiscal year, the central bank said on Jan. 21. Just three months earlier the median was 1.7 percent.

Policy makers have signaled flexibility on the timing of achieving 2 percent price gains, a goal Kuroda said would be reached in about two years when he introduced the current asset purchase program. Kuroda said on Jan. 21 that the plunge in oil could delay inflation reaching the target in the coming fiscal year that starts in April.

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