Japan's CPI Remains Soft, Jobless Rate Nears Decade Low

Japan's jobless rate hit a 9-1/2-year low in July, but consumption remained soft and core consumer prices marked a sixth straight month of declines. Industrial production also fell in the month, but that was largely due to an earthquake on July 16, and output is forecast to jump in August.

All in all, the data pointed to a moderate recovery in the Japanese economy but did not change the perception that the recent turmoil in global financial markets will force the Bank of Japan to wait for a few months before raising interest rates.

"Within pure economic fundamentals, it looks quite supportive for the BOJ. The domestic economy is in line with the BOJ's upbeat scenario: A moderate recovery of the economy with very stable prices," said Takehiro Sato, an economist at Morgan Stanley.

"That said, the ongoing concerns about the global liquidity crunch might mean the BOJ won't be able to hike rates in September and the next hike may be delayed until December at the earliest," he added.

Japanese core consumer prices (CPI) fell 0.1% in July from a year earlier, matching the consensus forecast.

In the Tokyo area, the core consumer price index was flat in August, above the consensus forecast of a 0.1 percent decline.

"Tokyo CPI was a bit stronger than expected. So there may be the possibility that nationwide core CPI will hit zero in August, although it is in October that it will start rising clearly," said Takahide Kiuchi, chief economist at Nomura Securities.

Consumer prices have been falling slightly despite Japan's solid economic expansion, partly on declines in crude oil prices and tame wage growth.

Analysts have also pointed to companies' reluctance to put higher price tags on their products as inflationary expectations remain low, fearing they may be the only ones in the industry to do so and could thus lose out to their competitors.

Many economists still expect consumer prices to start rising again later this year, with a rebound in oil prices seen pushing up CPI growth.

Tightening Labor Markets

Separate data showed that the jobless rate fell to 3.6%, matching a low hit in February 1998 and beating a consensus for an unchanged reading from June's 3.7%.

Industrial output fell 0.4% in July from the previous month, slightly smaller than a median market forecast for a 0.5% drop.

A government official said the July 16 earthquake in northern Japan, which hit a major car parts company factory and briefly halted production at major Japanese automakers, reduced output in the month by about 1%.

Manufacturers' output -- the core component of production -- is expected to rise 6.8% in August but fall 2.5% in September.

Some analysts said inventory adjustments in the hi-tech sector, which have been a drag on production, seem to be ending.

"Industrial production data indicates the adjustment in the IT sector is coming to an end. Overall production will show a recovery in the July-September quarter," said Yoshimasa Maruyama, an economist at BNP Paribas.

But U.S. subprime problems and ensuing turmoil in global markets are raising uncertainties over the outlook for the Japanese economy.

"With downside risks to the U.S. economy emerging, the Japanese economy is unlikely to accelerate in October-December," Maruyama said.

The BOJ has been saying that year-on-year changes in consumer prices will likely pick up in the long run on anticipated rises in wages and a tightening of the output gap, requiring the central bank to gradually raise rates.

But a recent global credit squeeze sparked by jitters over U.S. subprime mortgage sector problems prompted the BOJ to put off a rate hike in August. Financial markets are now only pricing in about a 20% chance of a rate hike in September.