TOKYO, Jan 30 - Japan's unemployment rate fell to its lowest in two-and-a-half years in December and deflation showed signs of easing its grip on the economy, data showed on Friday, but consumers remained reluctant to spend. The fall in the jobless rate to 4.9 percent from 5.2 percent in November marked the first time since June 2001 that the number of unemployed has been below five percent of the workforce. Economists had expected the rate to stay at 5.2 percent, and the brighter picture reinforced expectations of some that GDP, helped by strong exports, could have grown by as much as five percent on an annualised basis in the October-December quarter. Upgrading the government's official outlook on the jobs market, an official at the Public Management Ministry said the unemployment rate, which hit a post-war record 5.5 percent in January 2003, was expected to keep falling at a moderate pace. Most of the pick-up was in the services sector, particularly in the medical and welfare area, but also in the hotel, restaurant and transport industries.
"The unemployment rate clearly broke out of the recent range, suggesting an improvement in labour conditions," said Takahide Kiuchi, an economist at Nomura Research Institute. "Still, firms are unlikely to stop cutting labour costs. They are unlikely to raise fixed wages, so I don't expect a drastic improvement in income," he said. Reflecting this, separate data showed wage earners' monthly spending per household in December fell by a real 3.2 percent from November to 383,037 yen ($3,617), seasonally adjusted. From a year earlier, however, spending was up 1.1 percent. Other data showed that deflation, as measured by the core nationwide consumer price index, was unchanged in December from a year earlier, although for the full year CPI fell 0.3 percent, down for the fourth straight year. "The decline in CPI is beginning to stop, but much is due to one-off factors such as a rise in medical costs, tobacco and rice prices after a poor harvest," said a government official. "So we cannot say at this point that falls in CPI are ending."
TOP PRIORITY
The persistent fall in consumer prices has somewhat eased from past years, but its debilitating effect still weighs on the economy as Japan tries to emerge from a decade-long slump. Prime Minister Junichiro Koizumi's government and the Bank of Japan have made tackling deflation a top policy priority. The BOJ has continued to loosen its "quantitative easing" stance -- flooding the markets with liquidity by keeping short-term interest rates at zero -- since adopting the policy in March 2001, in an attempt to stimulate demand. But demand remains slack as firms try to write off excess supply, and structural changes like cheap imports have kept downward pressure on prices. Many economists, however, expect the economic pick-up to continue. Industrial production rose 3.6 percent in October-December over the previous quarter, data showed on Thursday. A survey on Friday showed that manufacturing activity expanded again in January as orders, particularly for electronics, rolled in from home and abroad but the pace of growth cooled for a second month. The headline index in the /Nomura/JMMA Purchasing Managers Index (PMI) came in at 55.7, down from 56.0 in December but above the crucial 50 level for an eighth consecutive month. A reading above 50 in the PMI, which gives an early snapshot of manufacturing activity, suggests an expansion. A figure below it indicates a contraction.//