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Japan Retail Sales Beat Expectations, Rise in May

Japanese retail sales unexpectedly rose in May from a year earlier, government data showed, pointing to a slight recovery in personal spending, but economists expect consumption to remain weak in the coming months.

The data did little to alter market expectations that the Bank of Japan will raise interest rates around August, with traders waiting for more data in the next few days.

Retail sales rose 0.1% in May from a year earlier, beating economists' median forecast for a 0.4 percent drop, the Ministry of Economy, Trade and Industry said on Wednesday.

That was the first increase in eight months and followed a 0.7% fall in April.

"Overall, consumption may not be expanding rapidly as it did in the October-December and January-March quarters, but the latest data shows that it remains firm," said Azusa Kato, an economist at BNP Paribas.

Financial markets did not react much to the data, which provides clues to the course of personal consumption -- a key component that makes up about 55% of Japan's economy.

Traders were looking ahead to industrial output data due out on Thursday, followed by consumer prices and jobless figures on Friday and the BOJ's quarterly tankan report next Monday.

Compared with April, retail sales were up 0.5% on a seasonally adjusted basis.

Beverages sold well on relatively high temperatures and good weather during the month, leading to a 1.7% rise in food and drink sales, a ministry official told a briefing.

That offset a 4.5% fall in automobile sales, although the pace of decline in auto sales narrowed from the previous month's 7.3% drop, the official said.

The ministry left its assessment of retail sales unchanged, saying sales were largely flat.

Despite the slight rise in May, economists said personal spending would be weak in coming months, with households benefiting little from strength in the corporate sector -- the main engine of Japan's current economic recovery.

"The headline figures were slightly better than expected," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan. "It showed that personal consumption is basically recovering, albeit at a modest pace.

"But you can't expect a recovery in consumption to pick up strongly considering sluggish improvement in wages and household income, as well as higher local taxes that went into effect this month," he said.

Retail sales have been sluggish over the past several months partly because of slack domestic automobile sales, while other government data last month showed household spending rose much more than expected in April.

Soft consumer spending last summer was partly behind the BOJ's decision to hold off from raising rates in January.

Consumption has bounced back since then and the central bank eventually raised its key policy rate to 0.5% from 0.25% in February.

The BOJ has said it will raise rates gradually to keep on top of inflation, and many analysts expect the next rate hike to come around August.

"The data itself won't have much impact on the BOJ's monetary policy," Shiraishi said.

"But we need to see the corporate sector strength passed on to households if the BOJ wants to accelerate the pace of credit tightening" after the next rate hike, he said.

The world's second-largest economy expanded by an annualised 3.3% in the first three months of 2007, led by growth in private consumption and exports, marking the ninth consecutive quarterly expansion.