Japanese annual inflation dipped to 0.9 percent in April, thanks to a short-lived cut in a gasoline tax, but economists warned this would bring just temporary relief and a new decade high loomed.
Making the Bank of Japan's job harder as it balances rising prices with a highly uncertain economic outlook, unemployment hit a seven-month high amid rising lay-offs, while industrial output and household spending dipped, April figures showed.
"To the BOJ, which regards rising prices as an economic downside risk, today's result does nothing for a future rate hike," said Seiji Shiraishi, the chief economist at HSBC Securities in Tokyo.
Japanese government bond futures edged up, clawing back from 10-month lows struck the previous day as the slowdown in core consumer inflation provided some relief to the battered market.
"The JGB market was slightly oversold and the market should react positively to the weaker-than-expected outcome," Shiraishi said.
A political row saw parliament block the renewal of a gasoline tax of 25 yen per litre, giving motorists a month of lower prices in April before the government managed to renew the charge -- just as rising oil prices sent gasoline higher.
"The nationwide CPI looks set to rise to 1.4 percent or above in May, which will further hamper consumption," said Junko Nishioka, an economist at ABN AMRO Securities. "The BOJ will have to keep a wait-and-see stance for the time being."
Fueling expectation for a higher figure for May's core inflation, which excludes some volatile fresh food prices, was rising inflation in Tokyo, which reports consumer prices a month earlier.
April's nationwide core annual inflation slipped from a 1.2 percent rise in March. In Tokyo, core annual inflation rose to 0.9 percent in May, from 0.7 percent in April.
The rising prices are taking a toll on consumer spending. Overall household spending in April fell 2.7 percent from a year earlier, a much bigger decline than the 0.9 percent fall that the market had expected.
Consumer sentiment has been sliding amid a series of price hikes in beer, bread, noodles and other groceries while wages remain generally stagnant and the job market stalls.
The jobs-to-applicants ratio for March was 0.93, meaning 93 jobs were available per 100 applicants, undershooting a median forecast of 0.94 and marking the lowest level in three years.
Seasonally adjusted unemployment rose to a seven-month high of 4.0 percent, with a record decline in the number of workers in the construction sector compared with a year earlier.
The outlook for the corporate sector, which has led Japan's growth, is also wobbly, as the subprime housing crisis hits exports to the United States.
Japan's industrial output dipped 0.3 percent in April, although manufacturers forecast output will jump 4.7 percent in May.
Japan's economy logged firm growth in the last two quarters, but analysts have warned of a downturn this year amid concern that deepening economic troubles in the United States could spread.
Japan's gross domestic product grew 0.8 percent in the first quarter, up from 0.6 percent in the previous quarter.
Firm exports and consumption underpinned the relatively robust growth, which beat the euro zone's better-than-expected 0.7 percent growth.
But corporate capital investment fell for the first time in three quarters and economists said exports could also face a turnaround point in light of slowing global growth.
The BOJ last month ended its bias towards raising rates, saying the economic outlook was too uncertain to set a clear direction.
Central bank governor Masaaki Shirakawa has repeatedly stressed downward risks to the economy, but with Japan's rates already a very low 0.5 percent markets do not expect a cut.
A Reuters poll last week showed that economists expect the next move to be a rate hike in early 2009.