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Japan inflation slows to lowest level in a year

A flurry of economic data released Friday revealed a mixed picture for Japan, suggesting the outlook remains challenging for the world's third biggest economy which slipped into recession in the third quarter.

While consumer inflation slowed to its lowest level in a year in October, raising skepticism over the Bank of Japan's (BOJ) ability to achieve its inflation target, industrial output and spending showed further signs of revival.

The nationwide core consumer price index (CPI) – which excludes volatile food prices – rose 2.9 percent in the month from a year ago. The figure was in line with a Reuters poll and follows a 3 percent rise in September.

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However, adjusted for an increase in the sales tax hike that took effect in the second quarter, core consumer prices rose 0.9 percent on year, below September's 1 percent rise and well below the 2 percent target the Bank of Japan (BOJ) aims to achieve by April 2015.

Industrial production rose 0.2 percent on month in October, above expectations for a 0.6 percent decline in a Reuters poll but down from September's 2.7 percent increase. Meanwhile, retail sales rose 1.4 percent on year, above expectations for a 1.2 percent rise but slower than September's 2.3 percent increase.

"I'm positively encouraged by the numbers," said Alex Treves, head of Japanese equities at Fidelity Worldwide Investment.

"The first thing that pops into my head is that I'm very glad that [Japanese Prime Minister Shinzo] Abe has already announced he wants to defer the consumption tax increase because it might just have been possible that he would have used numbers like these to say: Let's hike the consumption tax next year as planned. That would not have been the right thing," he added.

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Japan's economy has struggled since the government raised the sale tax to 8 percent from 5 percent in April, effectively shutting consumer's wallets.

To mitigate the move, the BOJ unveiled a fresh batch of stimulus measures at the end of October, the first time since launched its massive quantitative easing program in April last year.

Abe this month announced snap elections for December and delayed a second sales tax hike initially scheduled for October 2015 by 18 months, after data showed the world's third largest economy shrinking an annualized 1.7 percent in the third quarter, following an equally dismal 7.3 percent contraction in the second quarter.

Treves says the additional measures from the central bank were encouraging, and investors should to allow time for the stimulus to take effect.

Gary Conner | Getty Images | Getty Images

"The additional round of quantitative easing was only introduced on Halloween, so we haven't yet seen the impact of that coming through yet," he said.

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"This is a huge economy and by definition, change is incremental. It's taken us 20 years to get to this stage so we need to be patient. We've already seen signs that SMEs are asking for more loans from banks, they are clearly seeing more activity. Spending will feed through [to the public]," he added.

The BOJ governor Haruhiko Kuroda has repeatedly said the central bank is ready to do more if needed, and analysts say persistent below-view inflation readings could prompt further action.

"Should the data show the inflation run rate continues to fall short then speculation of further BoJ action will only ramp up," Stan Shamu, market strategist at IG wrote in a note before the data was released.

In other data, household spending fell for a seventh straight month in October, down 4 percent on year, beating Reuters' expectations for a 5.1 percent decline and better than September's 5.6 percent drop. Month-on-month, spending increased 0.9 percent, beating targets of a flat reading by Reuters, but down from a 1.5 percent rise in September.

Japan's jobless rate declined to 3.5 percent in October, below expectations of 3.6 percent and down from 3.6 percent in September. Meanwhile, the job-to-applicants ratio rose to 1.10 from 1.09 in September.