Japanese consumer prices fell less than expected in June, underscoring a slow improvement in deflation, and analysts said a steady economic recovery was on track even though households spent less in the month. Japan's nationwide core consumer price index (CPI), which excludes volatile fresh food prices, fell 0.1 percent in June from a year earlier, slightly less than the 0.2 percent drop expected by economists. "The CPI's nationwide drop was a bit smaller than forecast due to effects from rising gasoline prices, but it confirms that Japan still remains in mild deflation," said Yasunari Ueno, chief market economist at Mizuho Securities. The core CPI figure is closely watched because Japan's central bank has vowed to keep its easy monetary policy in place until year-on-year changes in the index stabilise above zero. Recent fast economic growth has raised optimism that five years of price falls are nearing an end, further spurred by recent rises in gasoline prices. Prices on regular gasoline surged 6.6 percent in June from a year earlier and those on premium gasoline rose 5.6 percent, the home affairs ministry said.
But their impact on the CPI was 1 percentage point, and price rises were offset by declines in prices of personal computers, air conditioners and insurance premiums. Bond yields surged last month on speculation that an end to deflation was closer than expected and would prompt the Bank of Japan to end its current hyper-easy monetary policy, worrying bond investors who could see the value of their holdings fall. "The CPI numbers were a relief for the market but there is still no change in views that the economy is recovering," said Tetsuro Sawano, senior fixed income strategist at Mitsubishi Securities. Separate data showed average spending by Japanese wage earner households, a key gauge of personal consumption, fell a real 1.3 percent in June from the same month last year. It was the first drop in three months after two months of robust gains. The figures, together with earlier ones showing Japanese retail sales fell in June for the fourth straight month, have raised some concern over the strength of personal consumption, the largest part of Japan's economy. "Consumption is not very strong. It's hard to expect a strong upturn in household spending," said Mamoru Yamazaki, chief economist at Barclays Capital Japan. "We might see a bit of a rise after July because bonuses were pretty high, but then that will likely be temporary."
CORPORATE SECTOR STRONG
While consumption looked sluggish, the corporate sector looked strong. The /Nomura/JMMA Purchasing Managers Index (PMI), which gives a snapshot of manufacturing activity, rose to a seasonally adjusted 55.4 from 54.3 in June, staying above the 50 line -- the divide between expansion and contraction -- for a 14th straight month. "The rise in the headline index suggested that growth strengthened to a robust level," said the PMI report, based on responses from more than 350 manufacturers. Japan's economy grew by a real annualised 6.1 percent in the January-March quarter, outstripping U.S. growth in the same period, as an export-led recovery filtered through to capital spending and personal consumption. The improvement has helped big banks shed their piles of bad loans and has eased concerns about the financial system. More signs of a realignment in the sector emerged on Friday. Setting the stage for a rare takeover battle, Sumitomo Mitsui Financial Group (SMFG) <8316.T>, Japan's third-largest bank, said on Friday it would seek a takeover of UFJ Holdings <8307.T>, the fourth-biggest and weakest of the "big four" lenders. UFJ, which has been in the red for three years, is already in talks with second-ranked Mitsubishi Tokyo Financial Group Inc. (MTFG) <8306.T>. But talks came to a halt when a court earlier this week ordered UFJ to suspend the sale of its trust bank unit and granted Sumitomo Trust & Banking <8403.T>, which has close ties with SMFG, an injunction blocking UFJ from including its trust unit in merger talks with a third party. Other data on Friday showed a recent recovery in job conditions losing momentum. The jobless rate has been recovering slowly since hitting a record high of 5.5 percent in January 2003 but the seasonally adjusted rate in June remained at 4.6 percent, unchanged from May and in line with forecasts. The number of employed in June fell for the first time in five months to 63.74 million from 63.89 million in May. But the number of unemployed declined to 3.09 million in June from 3.19 million in the previous month. "The jobs environment seems to be recovering. But I don't expect wages to pick up at the same pace because companies are cutting back on their labour costs," said Seiji Adachi, an economist at Credit Suisse First Boston.///