Rise in unemployment puts brakes on Japan's economy

Japan's unemployment unexpectedly rose for a fourth straight month and industrial production fell the most in more than a year, signalling the economic expansion is poised to slow.

The jobless rate climbed to a seven-month high of 5.3 per cent in June, a statistics bureau report showed yesterday in Tokyo.

Factory output slid 1.5 per cent from May, compared with the median forecast in a Bloomberg News survey of economists for a 0.2 per cent gain. Meantime, consumer prices excluding fresh food declined 1 per cent from a year before.

Yesterday's data may make it tougher for Prime Minister Naoto Kan to build support for his plans to rein in the government's budget deficit as parliament gathers for the first session since he took office.

The Bank of Japan may also come under increased pressure to step up monetary stimulus as a rising yen threatens to contribute to deflation.

"We have to start worry about a slowdown," said Junko Nishioka, chief economist at RBS Securities Japan in Tokyo.

"Kan will be forced to shelve pursuit of fiscal consolidation and the Bank of Japan will also come under more pressure to take additional monetary policy action."

Japan's Nikkei 225 Stock Average dropped 1.4 per cent to 9,563.75 as of 10:16 am yesterday in Tokyo. The yen climbed for a third day to 86.62 per dollar, bringing its advance since the start of May to about 8 per cent.

The slump in Japan's production is a contrast with reports from several of the nation's companies that indicated an improved outlook. Sony and Panasonic, the world's largest consumer-electronics makers, signalled Japanese technology companies are withstanding slowing European demand and the stronger yen after raising their earnings forecasts.

Fujitsu also raised its profit projections.

Household spending rose 0.5 per cent in June from a year before, snapping a two-month decline, a separate report showed. The increase in the jobless rate last month came in part as the number of people out of the labour force declined, indicating more people are starting to look for work.

"We should brace for the economy falling into a soft patch toward the first quarter of next year," said Yoshimasa Maruyama, a senior economist at Itochu in Tokyo.

"Kan will have to tread a very delicate line in handling economic policies and fiscal consolidation."

Kan last month pledged to cap spending and bond sales over the next three years as part of plans to curtail the world's largest public debt. Economic and Fiscal Policy Minister Satoshi Arai said after yesterday's data that the recovery is intact.

Japan's expansion slowed to an annual 1.9 per cent pace in the second quarter from the first quarter's 5 per cent, according to the median estimate of economists surveyed by Bloomberg News.

- BLOOMBERG