In further evidence that Japan's recovery is reaching beyond major exporters, activity in service industries rose by more than expected in January thanks to strong retail sales, figures showed on Tuesday. But concern over global security took some of the shine off the improvement by hitting the dollar, which drew warnings from Japanese ministers that they would act to hold down the yen if needed. The government's tertiary sector index, a measure of activity in service industries, rose 2.6 percent in January from December, the biggest increase since March 2000, helped by strong retail sales of clothing as well as firm demand for financial services, property rentals and business services such as maintenance. "Industrial output had already shown robust growth in the manufacturing sector in January and the tertiary sector figures confirm that economic activity was strong across the board," said Mamoru Yamazaki, chief economist at Barclays Capital (Japan). The figures will add to growing optimism that conditions are improving in parts of Japan's economy reliant on domestic demand, which had lagged behind the export-driven manufacturing sector.
Signs of a pickup in consumer spending will be especially welcome because it is the largest part of Japan's economy but has also been the most persistently sluggish. Japan's banks also appear to be on the mend after years of struggling with bad loans, with Mizuho Financial Group <8411.T> -- one of the world's largest banks by assets -- and others planning to return some of the government cash they got as aid six years ago. The improvements will come as a relief to the government, which has sold a record amount of yen since the start of 2003 in intervention in the foreign exchange market to curb the yen's strength, which officials worry could derail the export-reliant recovery. But the yen strengthened further on Tuesday on heightened concerns about security in the wake of Israel's killing of the spiritual leader of militant Palestinian group Hamas.
JAPAN WILL ACT
The yen was hovering near 106.78 yen to the dollar, within 1.5 percent of three-and-a-half-year highs around 105.10 set last month and up some 25 percent since January 2002. Finance Minister Sadakazu Tanigaki and Vice Finance Minister for International Affairs Zembei Mizoguchi reiterated they would take action against volatile moves in exchange rates. "Basically, our stance remains as it was," Tanigaki told a news conference after a cabinet meeting. "We are watching the market closely and will act when needed." Mizoguchi declined to comment on the possible effects on currencies of the latest Middle East tension, simply reiterating that volatility was undesirable. Bank of Japan Governor Toshihiko Fukui, however, endorsed the intervention policy, saying such efforts made sense given that the economy remained vulnerable.
"Currency movements that are too irregular may nip the recovery in the bud and affect corporate sentiment...because the current economic recovery was sparked by exports," he told a parliamentary committee. Financial markets reflected the mixture of good news and caution, with the Nikkei share average <.N225> falling as much as 2.2 percent at one stage before recovering to end down 0.33 percent, while bond prices rose. The yield on the cash benchmark 10-year bond (JGB) <0#JPTSY=JBTC> fell four basis points to 1.330 percent. Analysts said the 2.6 percent rise in the government's all-industries index, also released on Tuesday, showed that the recovery was likely to continue in the January-March quarter after the fastest growth in 13 years in October-December 2003. Behind the pacey growth has been strong demand for digital electronics, cars and steel in the fast-growing Chinese market. But few expect Japan's growth to keep such a pace in the current quarter, and recent external events provide a note of caution. "Going forward...the primary focus will remain on the direction of the global cycle, especially considering the recent spate of destabilising world events," said Ryo Hino, an economist at JP Morgan.///