Japan Releases Positive Economic Data

Optimism was tempered by a drop in household spending and a report showing that unemployment remained steady at 4.1 percent in August.

But investors still showed confidence in Japan's economic prospects, lifting the Nikkei 225 stock index higher for a third straight session. The index rose 0.64 percent to 16,127.58.

The overall figures point in the right direction for Prime Minister Shinzo Abe, who took office Tuesday and is under pressure to sustain the economic revival that started under his predecessor, Junichiro Koizumi.

Japanese industrial production rose 1.9 percent in August from the previous month, while shipments jumped 2.5 percent, the Ministry of Economy, Trade and Industry said Friday, adding that output is in an upward trend.

While output is forecast to slip 0.1 percent in September, it is seen rising 1.8 percent the following month, the ministry said.

Meanwhile, the nation's core consumer price index rose 0.3 percent in August, the government said separately, offering fresh evidence that the economy is steadily pulling out of deflation. That follows an increase of 0.2 percent in July.

The core CPI data, which excludes volatile fresh food prices, suggest that Japan's economy is pulling out of deflation and supports the Bank of Japan's decision to raise interest rates in July for the first time in six years. Its key rate was raised to 0.25 percent from virtually zero, and attention now turns to whether the central bank will hike rates again sometime late this year or early next.

"The data boosted our confidence about Japan's economy, though we need to watch the development for another few months before deciding whether the trend is likely continue," said Keiji Kanda, an economist with Daiwa Institute of Research Ltd.

Japan has faced the danger of deflation, a continuing drop in prices that deadens economic activity by bringing down wages and profits. Most industrialized nations worry about the opposite danger - rising prices or inflation.

Still, government authorities remained cautious.

"Since there was a long period of deflation we need to make a careful decision on whether the economy has really overcome it," Chief Cabinet Secretary Yasuhisa Shiozaki said Friday. "We need to make sure the situation will not return to deflation."

Economy Minister Hiroko Ota warned that excluding prices for oil prices, actual year-on-year price changes are around 0 percent and said the government needs to guard against falling back into deflation.

The comments seemed indirectly aimed at suggesting another interest rake hike by the BOJ was not immediately needed. Ota said she hopes the BOJ shares the administration's policy goals, but said the central bank must decide its own policies independently.

New Finance Minister Koji Omi meanwhile said he plans to hold his first meeting with U.S. Treasury Secretary Henry Paulson on the sidelines of the Group of 20 financial gathering in Australia in November, Kyodo News reported.

On the labor front, Japan's unemployment rate remained unchanged at 4.1 percent in August, just a hair above an eight-year low of 4.0 percent reached earlier this year and matching the forecast of economists surveyed by Dow Jones.

The number of unemployed fell by 120,000 people from a year earlier to 2.70 million, marking the ninth straight month of declines, while the number with jobs rose by 220,000 to 64.27 million, marking the 16th straight month of increases.

One cause for alarm, however, was a 4.4 percent decrease in spending in August by Japanese households headed by wage earners. The indicate households are spending less as the pace of wage increases slows.

The figure was much worse than an average forecast of a 1.7 percent drop, according to a Dow Jones survey of economists.

For the five last years, Japan has mounted an economic comeback from more than a decade of doldrums, under reforms ushered in by Koizumi. But the new premier faces a host of challenges including taxation problems, a growing gap between rich and poor, massive government debt, a shrinking population and a lingering oversensitivity to U.S. downturns.