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Japan output rises but deflation threatens recovery

January 29, 2010 | AFP

TOKYO — Japan's economy showed fresh signs of recovery Friday as factory output picked up and unemployment fell slightly, but a drop in consumer prices highlighted that deflation remains a key threat.

Asia's biggest economy last year emerged from its worst post-war recession, growing in the second and third quarters due to rebounding exports, much of it to booming China, and government pump-priming measures.

As overseas demand has picked up, Japan's industrial output rose 2.2 percent month-on-month in December, the 10th straight monthly rise, new data showed.

December also saw the first year-on-year rise in exports for Japan in 15 months, according to figures released Wednesday.

"The fresh data show that Japan is on a steady path to recovery," said Taro Saito, senior economist at NLI Research Institute. "Concerns that Japan's economy will get mired in a double-dip recession have eased.

"Given that exports are rebounding steadily, Japan's economic recovery is likely to continue, even if its pace slows slightly."

The finance ministry said in its October-December quarterly report Friday that, although the world's number two economy remains "in a severe situation, some areas are showing signs of picking up."

Japan's jobless rate fell to 5.1 percent in December, improving 0.1 percentage point from the previous month, against market expectations of a rise to 5.3 percent, government data showed.

Prime Minister Yukio Hatoyama said that despite the slight improvement in the unemployment rate, "it is far from giving us cause for optimism," and pledged that future stimulus measures would help create fresh jobs.

In other data, the government said there were 46 job offers for every 100 job seekers in December.

Deflation remained another key threat to the Japanese economy. A fall in general prices cuts into corporate profits, leading firms to slash jobs and put off capital investment that generates growth.

Core consumer prices fell 1.3 percent in December from a year earlier, the 10th straight monthly drop, government data showed.

Prices in Tokyo fell 2.0 percent year-on-year in January. The index is seen as a bellwether because it comes a month before national figures.

"Declines in prices of services are notable, and this kind of price drop can easily translate to weaker wages for workers in the industries," warned Barclays Capital chief Japan economist Kyohei Morita.

"Although the risk is not big yet, we should be careful to monitor Tokyo's wages and price trends," he said. "The Tokyo metropolitan area may fall into a deflationary spiral down the road."

Last month Japan's central bank said it was a "critical challenge" for Japan's economy to overcome deflation, which also hurts demand because it encourages consumers to put off purchases.

By Kyoko Hasegawa

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