New Data Casts Doubt on Japan’s Economy

10/31/2006

By THE ASSOCIATED PRESS
Published: October 31, 2006
Filed at 5:37 a.m. ET

TOKYO (AP)—New figures Tuesday showed that Japan’s economic comeback may have lost a little momentum, with a tick up in September’s jobless rate and the ninth straight decline in household spending. The country’s central bank meanwhile kept interest rates unchanged.

Japan’s unemployment rate rose to 4.2 percent in September, up from 4.1 percent posted in August. Meanwhile, spending by households headed by wage-earners fell by a bigger-than-expected 6.6 percent from last year, indicating personal consumption remains fragile.

Just hours later, the Bank of Japan released its semiannual report and said was keeping its benchmark interest rate unchanged at 0.25 percent, as expected. The central bank lifted that interest rate in July for the first time in six years, saying that healthy growth was firmly rooted.

Keeping rates low can encourage growth because it makes it more affordable for businesses to borrow money to fund expansion and for consumers to borrow for investments and purchase.

‘’The data point to the economy losing some momentum and are a bit of a warning sign at a time when the Bank of Japan is inching toward raising interest rates,’’ said Hiroshi Shiraishi, economist at Lehman Brothers.

‘’Fundamentally, the economy has improved quite a bit so a sharp slowdown seems unlikely, but there is a risk it could get stuck at this slow rate of nominal gross domestic product growth, and recent data do point toward that,’’ he added.

Economy minister Hiroko Ota remained largely upbeat despite the jobless data, but said household spending must be carefully watched. Finance Minister Koji Omi maintained that the overall economy is still ‘’on firm footing.’’

Consumer spending remains the worrisome wild card in Japan’s economic comeback, said Masaaki Kanno, an economist at JP Morgan Securities in Tokyo. He said weak consumption will likely drag down economic growth in the July-September quarter. Kanno was expecting 1.2 percent growth, but now says it will likely be lower.

‘’There is still no clear sign consumption is picking up,’’ Kanno said.

Long-term, however, strong performance by Japan’s exporters may feed wage increases and fuel an uptick sometime early next year, he predicted.

Separately Tuesday, the BOJ released its semiannual report, predicting the rebound would continue.

For the fiscal year starting April 2007, it forecast the economy would grow 2.1 percent, and that consumer prices would rise 0.5 percent.

The report was being closely watched for signs the bank might raise interest rates later this year, but BOJ Governor Toshihiko Fukui said any hikes would be incremental if the economy expands as the bank expects.

‘’If economic and price conditions change according to the outlook report, policy rate adjustments will be gradual in accordance with the developments in the economy and prices,’’ he said.

There remains some concern that further interest rate increases could stifle Japan’s economic recovery by slowing consumption and prompting a return of deflation, a damaging downward spiral in prices.

September’s jobless rate was higher than an average forecast of 4.1 percent, according to a Dow Jones Newswires survey of economists. It fell to an eight-year low of 4.0 percent in May.

Japan’s contracting household spending underlined the sagging confidence in the economy.

September’s 6.6-percent decline was much bigger than the 2.1-percent decrease expected by economists surveyed by Dow Jones and Nikkei News. The propensity to consume, a ratio measuring the amount of disposable income going to household spending, fell 5.2 points in September, after falling 5.4 points in August.