Japan's inflation rises, jobless falls to 8-year low

Japan's inflation rate rose last month and the jobless rate unexpectedly fell to an eight-year low, backing the central bank's case that the lowest interest rates among major economies need to increase.

Core consumer prices, which exclude fresh food, climbed 0.2 percent from a year earlier, the statistics bureau said in Tokyo today, matching economists' estimates. The unemployment rate dropped to 4 percent from 4.1 percent in October, the bureau said.

Bank of Japan Governor Toshihiko Fukui said yesterday that recent inflation and consumer spending information has been ``somewhat weak'' and the bank should examine more data before deciding whether to raise rates. Today's numbers also showed household spending fell at the slowest pace this year, keeping alive the possibility the bank may take action next quarter.

Core prices gained for a sixth straight month and advanced faster than a 0.1 percent increase in October.

The yield on Japan's 10-year bond slipped 1.5 basis points to 1.565 percent at 3:18 p.m. in Tokyo, the lowest since March 1, as gains in Tokyo core prices unexpectedly failed to accelerate in December, signalling inflation may slow in coming months.

"The one disappointment for the BOJ should be that Tokyo core CPI didn't accelerate," said Naomi Hasegawa, a senior fixed-income strategist in Tokyo at Mitsubishi UFJ Securities Co. "It's not strong enough to support a rate hike in January."

Tokyo prices

Core prices in Tokyo, a harbinger of nationwide inflation, advanced 0.2 percent in December, the same rate as November and less than economists' expectations for a 0.3 percent gain.

Household spending slipped 0.7 percent in November from a year earlier, the statistics bureau said, half the rate expected by economists in a Bloomberg News survey. The decline eased after slipping 2.4 percent in October and 6 percent in September.

"I have no doubt that weak consumer spending in summer is picking up from this fall," said Naoki Murakami, an economist at Goldman Sachs Japan Ltd. "Strong demand from the corporate sector is driving the jobless rate lower."

The job-to-applicant ratio, which shows how many positions are on offer to a job seeker, stayed at 1.06, the labour ministry said. There have been more jobs available than applicants every month this year.

"We're seeing more tightness in the labour market and that's positive for wages," Daiwa SB's Onakado said.

Taken to two decimal places, the jobless rate fell to 3.99 percent in November, the lowest since reaching 3.85 percent in March 1998, the statistics bureau said. Economists expected the rate to stay at 4.1 percent.

Improving job prospects have failed to feed into wage growth so far in 2006 and consumer spending has declined every month this year, prompting the government to downgrade its assessment of the economy last month. Prime Minister Shinzo Abe yesterday said companies should pass profits onto their employees by increasing wages.

Today's consumer price report shows progress is being made in shaking off deflation, Economic and Fiscal Policy Minister Hiroko Ota told reporters today.

The central bank raised the key overnight lending rate to 0.25 percent in July, its first rate increase since August 2000. Governor Fukui said yesterday that core price gains will eventually accelerate and the bank needs to increase borrowing costs as long as the economy and prices develop as it projected. Inflation may slow

Investors and traders were pricing in a 60 percent chance that the central bank will increase the key rate next month, based on contracts for the overnight exchange of interest payments, according to Credit Suisse Group. Today's figure is up from 58 percent on Dec. 22.

Still, some economists said inflation will slow in the coming months, making it harder for the bank to raise rates. Core prices rose at a faster pace last month because the effect of mobile phone fee reductions made in November 2005 disappeared, said Azusa Kato, an economist at BNP Paribas Securities Japan. The fee cuts dragged the level of the consumer price index lower on a year-on-year basis.

The effect of falling oil costs will keep inflation low, Kato said, adding that Tokyo's December core price number signals the national rate may slow to 0.1 percent this month.

Crude oil

"Consumption data suggested improvement, but there's a possibility that nationwide core prices will decelerate after the November increase," she said. "Today's inflation data failed to back up a January interest rate increase."

Dubai crude, the benchmark for Asian refiners, has dropped about 19 percent since advancing to a record $72.10 on July 17.

Fukui yesterday said inflation may remain moderate because of cheap goods imported from emerging economies and companies keeping the lid on wage increases to stay globally competitive. The bank must closely monitor the pace of price gains, he said.

The central bank will conclude its next policy board meeting on Jan. 18.