Updated: 05/30/2014 10:57 | By Agence France-Presse

Sales tax hike dents Japanese economy

Japan's economy stumbled last month as a sales tax hike and creeping inflation dented consumer spending and factory production, fresh data showed Friday, underscoring the fragility of the nation's recovery.

Sales tax hike dents Japanese economy

A pedestrian walks past the Bank of Japan headquarters in Tokyo on May 21, 2014 - by Kazuhiro Nogi

Despite some good news -- unemployment held at a seven-year low and Tokyo's war on deflation logged another victory -- the slate of economic data confirmed fears that jacking up the consumption tax would deal a blow to spending and the wider economy.

The ministry of economy, trade and industry downgraded its view on the output of the nation's factories, which contracted 2.5 percent in April, saying "industrial production appears to be flat".

That gloomy view reversed its month-earlier assessment that activity was picking up.

It also came a day after separate data showed retail sales plunged last month as shoppers made a last-minute dash to buy staples and big-ticket items such as cars and refrigerators before the April 1 increase -- Japan's first sales tax rise in 17 years.

Household spending, meanwhile, dropped 13.3 percent from March, logging the biggest monthly tumble since March 2011 when Japan was hit by a quake-tsunami disaster and the subsequent Fukushima nuclear crisis.

"The peak for (industrial) output was January, and we've seen it had declined a lot since then," said Takeshi Minami, chief economist at the Norinchukin Research Institute. "As further decline in consumption due to April's tax hike is likely, I believe output will fall further," he added.

That will likely stoke more questions about whether the Bank of Japan would expand its monetary easing campaign to counter a downturn. 

BoJ chief Haruhiko Kuroda has repeatedly said he was ready to pull the trigger on more policy moves if the economy needs a stimulus injection. 

But the central bank has, so far, held off expanding the massive asset-buying scheme -- similar to the Federal Reserve's quantitative easing -- that it launched last year. 

- Tight household budgets -

The BoJ programme is a cornerstone of Prime Minister Shinzo Abe's bid to stoke the world's number three economy with big government spending and monetary easing, a plan aimed at reversing years of falling prices which held back growth.

The idea is to stoke prices in the hopes that firms will expand their businesses, wages will pick up and, in turn, generate growth. 

A sharp decline in the yen last year boosted profitability among major exporters such as like Sony and Panasonic and sparked Japan's strongest annual stock market rally in percentage terms in more than four decades.

But critics have derided the BoJ's moves as a useless money-printing exercise and there has been increasing scepticism over its target to reach a steady 2.0 percent inflation rate by next year.

However, the data Friday showed inflation was picking up -- largely owing to the tax hike -- as consumer prices in April rose 3.2 percent from a year ago, picking up pace from a 1.3 percent rise in March, and the fastest pace in 23 years.

With the effect of the tax raise stripped out, real inflation was estimated at around 1.5 percent.

The job market remained tight, with the unemployment rate standing at a nearly seven-year low of 3.6 percent.

There is big demand in the construction industry for workers on disaster rebuilding projects and venues for the 2020 Olympics in Tokyo.

Credit Agricole said the job market was likely to remain buoyant, with large-scale job cuts thought unlikely.

"Of more importance will be whether the tight labour market conditions will lead to stable wage growth so that private consumption will hold on its own against negative impact of the tax hike."

-- Dow Jones Newswires contributed to this report -- 

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