Japan's industrial production grew by most since 2011 in January, rising 4% from December, exceeding economists' estimate of 2.8% increase; economic growth set to surge in quarter ahead of April tax hike

TOKYO , February 28, 2014 () – Japan’s industrial production grew the most since 2011, indicating the economy is strengthening as a looming sales-tax bump stimulates demand, while inflation matched the highest level in more than five years.

Output rose 4 percent in January from the previous month, the trade ministry said today in Tokyo, more than a 2.8 percent median estimate in a Bloomberg News survey of 33 economists. Consumer prices excluding fresh food climbed 1.3 percent from a year earlier, the statistics bureau said.

Economic growth is set to surge this quarter as consumers and businesses splurge ahead of the April tax increase. The test for Abenomics and the Bank of Japan will be steering the nation through the aftermath, with the economy set to contract for a quarter and analysts projecting that Governor Haruhiko Kuroda will be forced to add to already unprecedented easing.

“Demand is likely to decline considerably after the sales- tax increase,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “The tax-rise may have a harsher impact on the economy than the government and BOJ predict.”

The yen rose 0.3 percent to trade at 101.79 against the dollar at 1:36 p.m. in Tokyo. The Topix stock index fell 0.7 percent, headed for its second monthly loss after a 52 percent rise last year.

BOJ Communication

While the economy is showing momentum, BOJ board members this week underlined challenges Prime Minister Shinzo Abe and the central bank face as they try to end 15 years of deflation and improve the finances of a country with the world’s biggest debt burden.

Sayuri Shirai urged improved communication by the BOJ. She said that it’s “striking” that surveys show most of the public see price rises as a bad thing, indicating that the importance of achieving the BOJ’s 2 percent inflation goal “may not be widely understood.”

She cited a Bloomberg News survey this month on the outlook for monetary policy as evidence of the gulf between BOJ and private economists’ views on when the goal may be achieved.

Koji Ishida said a one-quarter contraction triggered by the higher sales tax won’t knock the economy off its growth track, but signaled concern about a lack of momentum in the nation’s exports -- a factor helping to drive record trade deficits.

Japan’s 1 percent growth in the fourth quarter was less than half the 2.8 percent rate forecast by economists, hurt by a trade shortfall driven by higher imports of fossil fuel and sluggish exports despite the yen’s 18 drop against the dollar last year.

Inflation Target

The economy is forecast to shrink an annualized 3.9 percent in the three months from April, slumping after a projected fifth straight quarter of growth, according to a Bloomberg survey.

A two-year time horizon for achieveing the target shouldn’t be rigid, Shirai said in a speech at Columbia University published in Tokyo today.

Barclays Plc sees it taking until around 2017 for core inflation to reach 2 percent, economists Kyohei Morita and Yuichiro Nagai wrote in an e-mailed note.

Barclays is one of 25 of 34 economists that forecast that the BOJ will add to stimulus by the end of September, according to a Bloomberg survey on Feb. 6-12. Thirteen project action by the end of June.

Transport Equipment

The world’s third-biggest economy is showing strength for now. Surging production of transport equipment and machinery helped to drive output to its biggest gain since June 2011. Household spending jumped 1.1 percent from a year earlier, more than 0.5 percent projected in a Bloomberg survey.

Retail sales posted the biggest increase in January since April 2012, rising 4.4 percent on year to 11.7 trillion yen ($114.8 billion), the most for the month of January in data back to 1980, the trade ministry said. The consensus forecast was for a 3.8 percent rise.

Overall consumer prices rose 1.4 percent on year, while inflation excluding perishables and energy held steady at 0.7 percent. In contrast, wages excluding overtime and bonuses fell 0.6 percent in December from a year earlier, a 19th straight decline.

The job market showed further signs of improvement, which could start to support wages and help households deal with the higher sales tax and inflation.

Labor Market

While the unemployment rate held steady at 3.7 percent in January as forecast, demand for workers picked up. There were 1.04 open positions for every job seeker, the most since August 2007.

The burst of fiscal and monetary stimulus that formed the first part of Abe’s effort to boost the economy helped drive down the yen, fueling exporters’ earnings.

Labor unions at all of Japan’s automakers are seeking increases in base salaries as companies such as Toyota Motor Corp. and Honda Motor Co. forecast record profits this fiscal year.

Investors are watching whether Abe follows through with steps to loosen business regulations, the so-called third arrow of Abenomics. Abe is due to flesh out his growth strategy in June.

An incomplete package could restrain growth, shaving 2 percent from Japan’s economy by the end of the decade, the International Monetary Fund said in a report in August.

--With assistance from Yuki Yamaguchi, Jacob Adelman, Chikako Mogi and James Mayger in Tokyo. Editors: Arran Scott, Andy Sharp

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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