Consumer prices climb in Japan, retail sales fall

TOKYO (AP) Japan's economic recovery gained momentum in July as manufacturing accelerated and consumer prices rose for a second straight month, despite weaker household spending and retail sales.

The data released Friday showed the consumer price index rose 0.7 percent in July from a year earlier, for the second straight month of gains. That suggests efforts to break free of years of demand-dampening deflation are progressing. The CPI rose 0.2 percent in June.

However, the core index, which excludes food and energy prices, fell 0.1 percent.

The Ministry of Economy, Trade and Industry said industrial output rose 1.6 percent from a year earlier but 3.2 percent from the month before, in a sign the recovery is taking hold. It forecasts further expansion in August and September.

"Income and other data show quite positive signs of recovery," said Junko Nishioka, an economist at RBS Japan Securities. "I'm relatively optimistic about the Japanese economy."

The government has boosted spending and pushed for ultra-loose monetary policies aimed at generating inflation. It says that will help perk up demand and, in response, investment and employment, ending years of stagnation. However, economists say that without matching increases in wages, rising prices and planned tax hikes could actually weaken the consumer demand that accounts for the bulk of business activity, undermining any economic rebound.

Average household spending fell 1.4 percent in July from a year earlier, despite slight improvements in income and the jobless rate, which fell to 3.8 percent from 3.9 percent the month before.

Retail sales fell 0.3 percent in July from a year earlier for the first decline in three months. Sales of clothing and other items sagged, while food sales rose.

The government attributed at least some of the limpness of demand to hot weather. But with prices rising, many consumers already are feeling a pinch, Capital Economics said in a commentary.

"Perhaps the biggest threat to consumer spending is the rise in inflation," it said, noting that bustling sales earlier in the summer were probably helped by June bonus payments and overtime.

"Households are probably well aware that once the summer bonus season is over, wages will likely continue shrinking, depressing their purchasing power," it said.

Still, the overall positive tone of the July data will likely bolster support for pushing ahead with a sales tax planned for April 1, 2014. A decision on that plan is due within the next month.

The anticipated 3 percent increase in the nationwide sales tax, to 8 percent, will undoubtedly be a blow, Ishioka said, but she expects it to be short-lived given the currently favorable trends.

"People's sentiment is improving. I think the fundamental conditions are OK," she said.