Japan released a flurry of data Friday which showed a spotty economic recovery, as the consumption tax hike in April continued to weigh on growth.
Household spending fell 5.9 percent in July from the year-ago period, much larger than the 3 percent drop forecast in a Reuters poll, and after falling 3 percent in June.
Retail sales showed a slight improvement, rising 0.5 percent on year in July, above expectations for a 0.1 percent rise in a Reuters poll, and recovering from the 0.6 percent drop in June.
Nationwide core consumer price index rose 3.3 percent in July, in line with forecasts, but when excluding the effect of the April tax hike core inflation stood at 1.3 percent in July, below the inflation target that the Bank of Japan (BOJ) pledged to meet sometime next year.
"The inflation that you're getting is just a rise in price levels associated with that tax increase so this is not really the desirable inflation that you want," said Paul Sheard, chief global economist at Standard & Poor's. "In fact, it's kind of counter-productive [in the sense that] it just eats into real purchasing power and creates a bit of a headwind for the recovery."
"The inflation that the BOJ wants to achieve is underlying inflation and that needs to hinge on the BOJ convincing people that there'll be 2 percent inflation consistently in the times ahead. In other words, the BOJ needs to work on the expectations of the public and that's harder than just jacking up the headline number with the consumption tax hike," he said.