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Japan inflation quickens to over five-year high; output gains

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[January 31, 2014]  By Leika Kihara and Stanley White

TOKYO (Reuters)  Japan's core consumer inflation rose at the fastest pace in more than five years in December and the job market improved, encouraging signs for the Bank of Japan as it seeks to vanquish deflation with aggressive money printing.

Factory output also grew in December and manufacturers expect to keep increasing production, although some analysts fret about the potential damage from the recent turmoil in emerging markets.

"The core consumer price index was stronger than expected, and durable goods prices seem to be rebounding. Consumer prices will likely continue its moderate growth," said Junko Nishioka, chief economist at RBS Securities.

"I think the BOJ is unlikely to adopt additional easing because there is no reason to justify it given the positive macro-economic environment."

Core consumer prices (CPI), which excludes fresh food but include energy costs, rose 1.3 percent in December from a year ago, data showed on Friday, just above a median market forecast for a 1.2 percent gain.


That followed a 1.2 percent increase in November, and marked the fastest annual gain since 1.9 percent in October 2008, data from the Ministry of Internal Affairs and Communications showed.

In a sign price gains are broadening, the so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, rose 0.7 percent in the year to December, matching a high hit in August 1998.

Japan's industrial output rose 1.1 percent in December, suggesting that robust domestic demand is underpinning the economy as consumers rush to beat a national sales tax hike in April. This is making up for soft exports to emerging markets.

The rise roughly matched a median market forecast of a 1.2 percent increase and followed a 0.1 percent drop in November.

The jump in output is a welcome sign for the world's third-largest economy, which has steadily recovered over the past year on the back of Prime Minister Shinzo Abe's massive fiscal and monetary stimulus policies.

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Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 6.1 percent in January and increase 0.3 percent in February, data showed on Friday.

Robust domestic demand, coupled with a weak yen that inflates import costs, helped Japan pass the halfway mark toward achieving the BOJ's 2 percent inflation target.

BOJ Governor Haruhiko Kuroda has expressed confidence that prices will reach the bank's target in the two-year timeframe it pledged in adopting an aggressive stimulus policy in April.

But many analysts remain skeptical on whether price growth will accelerate from here, worried about an expected slump in consumption after the tax hike and the fading boost from the weak yen on prices.

An International Monetary Fund official said Japan's economy is likely to take longer than the two-year timeframe to reach the inflation goal, even though prices are rising steadily.

(Editing by Shri Navaratnam)

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