Japan data question effectiveness of Abenomics

Japan released a string of economic data on Friday which was mixed and painted diverging pictures for Japan’s industries and consumers. Factory output grew sharply in January, helped by a weaker yen and rising exports. Nine months after a broad sales tax increase, consumption remained weak, keeping inflation muted.

Industrial production soared 4.0% on month in January, lifted by robust exports of electronic components and automobiles to Asia and the U.S. That kept the labor market tight, with plenty of jobs to go around for job seekers.

But that hasn’t translated into the lifting of consumer sentiment. Household spending fell 5.1% from a year earlier in inflation-adjusted real terms, worse than the 4.1% forecast. Retail sales were also down 2.0% from a year earlier.

The mixed picture highlights the continued challenge for Prime Minister Shinzo Abe more than two years after he kicked off a stimulus program known as Abenomics. The economy has yet to achieve Mr. Abe’s intended goal of a virtuous cycle of growth fueled by recovery in the corporate sector leading to higher pay for workers and more spending by households.

Reflecting the weak domestic spending trend, consumer price inflation maintained a downward trend. After stripping out volatile fresh food and an increase in the sales tax last year, consumer inflation growth slowed to 0.2% in January from the previous month’s 0.5%.

The falling trend of consumer inflation is expected to become even clearer after April, when the price-boosting effects of the sales tax increase will wear off, potentially raising the specter of another round of monetary easing by the Bank of Japan.

But Mr. Abe and BOJ Gov. Haruhiko Kuroda will face a difficult question, of whether to continue their anti-deflation campaign, which could further reduce the purchasing power of consumers or to give up on stoking inflation expectations, even though Mr. Kuroda has said they are crucial for ending the deflationary mind-set that has taken root in Japan over the past decade.

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