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Japan government turns more cautious on weak factory output

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[August 26, 2014]  TOKYO (Reuters) - Japan's government turned slightly more cautious about factory output and flagged a risk that April's sales-tax hike could have prolonged effects, a sign that the world's third-biggest economy is struggling with the higher tax and further stimulus might be warranted.

In its monthly report issued on Tuesday, the government stuck to its overall view of the economy, which it had raised in July. The new report said that a moderate recovery trend is intact, adding that there has been an easing from the pullback in demand that followed the sales-tax hike.

Previous monthly reports described industrial output as weakening "recently", following a boost in demand before the sales tax rose to 8 percent from 5 percent. In the latest report, the government dropped "recently" to sound more cautious about factory output.

Despite that wording tweak, the government left its assessment on industrial output unchanged from July.

"The economy is expected to recover moderately as effects of the sales tax hike ease gradually," said an official of the Cabinet Office, which compiled the monthly report for August. He added that improvement in the labor market and household income are expected to support private consumption from now on.

Still, the government flagged the risk of a prolonged impact of the tax hike, as well as weaker overseas economies, hurting the Japanese economy in future.

If weakness in the economy persists, that would threaten the Bank of Japan's inflation goal and could put pressure on the government and the BOJ to take fresh action to sustain growth.

The central bank sees the economy in a moderate recovery trend, while describing output as showing some weakness lately.

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Industrial output slid 3.4 percent in June, the biggest month-on-month decline since the March 2011 earthquake and tsunami. Production is expected to rise just 1.0 percent in July, according to a Reuters poll, as manufacturers face a pile of inventory and falling shipments.

Industrial production data for July is due on Friday.

Analysts expect Japan's economy will grow at an annualized rate of around 4 percent in the current quarter after the tax hike led to a 6.8 percent economic contraction in April-June.

(Reporting by Tetsushi Kajimoto; Editing by Richard Borsuk)

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