Jan 29, 9:23 PM EST

Factory data shows Japan economy turning corner on recession but inflation remains subdued

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Factory data shows Japan economy turning corner on recession but inflation remains subdued

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TOKYO (AP) -- Japan's industrial output edged higher in December, suggesting the world's third-largest economy may be turning the corner on a recession brought on by a hefty sales tax hike.

Data released Friday showed manufacturing output increased 0.3 percent in December from a year earlier and by 1 percent from the month before. However, inflation moderated to 2.5 percent from a year earlier, compared with 2.7 percent in November. The core consumer price index, excluding food, fell 0.2 percent from the month before.

Prime Minister Shinzo Abe has made pushing prices higher the main focus of economic policies aimed at ending years of deflation that have discouraged corporate investment and stymied growth.

Falling energy costs thanks to the plunge in oil prices is countering that trend. But lower oil prices have had a limited effect on the economy so far, since the CPI excluding both food and energy was unchanged from the previous month.

Meanwhile, Japan's jobless rate dipped to 3.4 percent from 3.5 percent the month before. But stagnant wages meant household spending dropped 3.4 percent from a year earlier.

When the impact of a 2 percentage point increase in the sales tax in April is excluded, Japan's inflation rate was well below the 2 percent target set by the government and the central bank, which is spending trillions of yen (billions of dollars) a month to buy government bonds and inject more cash into the economy.

For the "Abenomics" strategy to work, Japan's planners agree that wages must increase enough to boost consumer demand, which has stagnated as price increases have crimped household purchasing power.

"However, there is no evidence that a tighter labor market has strengthened price pressure," Marcel Thieliant of Capital Economics said in a commentary Friday. "Adjusting for the impact of the sales tax hike, prices are rising at the slowest rate since June 2013," he said.

He says the Bank of Japan will have to expand its already extraordinary level of monetary stimulus to get prices moving closer to its inflation target.


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