Factory output jumps on demand rush before tax hike

Japan's industrial output grew at its fastest rate in more than two years in January as factories cranked out goods ahead of a sales tax hike, adding momentum to the Abenomics experiment, data showed Friday.

In a further sign that once-stubborn deflation is starting to ease, prices also continued their upward trajectory, although this was mostly driven by higher fuel costs.

Shoppers are splashing out on pricey goods such as cars to beat the rise in sales tax to 8% from the current 5% in April, prompting companies to ramp up production.

January factory output soared 4% on-month, chalking up the fastest growth since the 4.2% rise in June 2011 when production was recovering from earthquake and tsunami damage.

Consumer inflation rose year-on-year for the eighth straight month while unemployment was stable at 3.7% with household spending climbing 1.1% on-year.

"Today's data confirm that the economy is picking up speed ahead of the consumption tax hike," Capital Economics economist Marcel Thieliant said in a note.

Masahiko Hashimoto, economist at Daiwa Institute of Research, also said "the economy as a whole is faring well".

Industrial production was strong largely thanks to rush demand for big ticket items whose prices have a big impact on household finances, he said.

But industries with less impact, such as machinery and chemicals, also showed growth, Hashimoto noted.

"It is inevitable that personal consumption will dip (after the April tax hike) but I do not think the economy will worsen rapidly from there," he said.

"Corporate earnings are good... Exports are likely to grow further, leading to higher spending on plants and equipment," which will eventually result in higher earnings for households, he said.

Some economists have warned the tax hike could dampen a budding recovery in the long-lumbering economy.

A survey by the industry ministry showed manufacturing companies plan to slash their production by 3.2% in March after raising it by 1.3% in February.

Production and inflation figures are closely watched for the success of Prime Minister Shinzo Abe's pro-spending policy blitz, dubbed "Abenomics".

He has put conquering deflation and stoking growth in the world's third-largest economy at the top of his agenda, meshing huge stimulus spending with aggressive monetary easing by the central bank.

The Bank of Japan has a 2% inflation target as Tokyo battles to reverse years of falling prices.

Data Friday showed core consumer prices, stripping out volatile fresh food prices, climbed 1.3%, the same rate as in December, which was the sharpest rise in more five years.

The upbeat headline was tempered by the fact that prices were still largely driven up by higher fuel bills.

Electricity prices jumped 8.5% and gasoline prices soared 6.5% while television set prices rose 3.7%.

Japan's energy costs soared in the wake of the 2011 Fukushima atomic disaster, which forced the shutdown of the nation's nuclear reactors.

Since the accident, Japan has been importing fossil fuels to plug the energy gap, a pricey option that has become even more expensive as the yen sharply weakened in the wake of the Bank of Japan's unprecedented monetary easing.

Hashimoto of Daiwa said prices of many other products rose.

"Durable goods prices had been stubbornly low despite higher manufacturing costs. A good economy is now enabling companies to pass on pushed-up costs on product prices," he said.

© (c) 2014 AFP