Aug. 31 (Bloomberg) -- Japan's consumer prices declined for a sixth straight month in July, signaling the world's second- largest economy has yet to overcome a decade of deflation. Industrial production and household spending dropped.
Core consumer prices, which exclude fresh food, fell 0.1 percent from a year earlier, the government said in Tokyo today, matching the median estimate of economists. Factory output dropped 0.4 percent and household spending slipped 0.1 percent.
Bonds rose as investors speculated the Bank of Japan would delay raising interest rates until it can gauge the effects of the U.S. mortgage recession on growth in the nation's biggest export market. Central bank Governor Toshihiko Fukui said last week the bank will decide policy by examining economic data and financial-market moves.
``Given the market turmoil and its negative implications for Japan's production and exports'' the Bank of Japan will find it hard to ignore negative data on consumer spending, said Kiichi Murashima, an economist at Nikko Citigroup Ltd. in Tokyo.
The yield on Japan's 10-year bond fell 2 basis points to 1.545 percent at 10:53 a.m. in Tokyo. The yen traded at 116.06 per dollar from 116.02 before the reports were published.
Mortgage Losses
Rate-increase expectations have fallen since losses on U.S. subprime mortgages this month caused corporate credit costs to jump, global stocks to plummet and the yen to surge.
Investors see a 14 percent chance policy makers will raise the key rate at the Sept. 18-19 meeting, according to Credit Suisse Group calculations based on interest payments.
Japan has struggled to shake off deflation that emerged after a stock and property-price bubble burst in the early 1990s and compelled the central bank to keep interest rates near zero percent. The Bank of Japan raised the benchmark overnight lending rate for the first time in almost six years in July 2006 and doubled it to 0.5 percent in February.
Factory production slid in July after an earthquake disrupted output at automakers Toyota Motor Corp. and Honda Motor Co.
Output would have risen had automakers not dragged the number down 1.2 percentage points, the Trade Ministry said. Companies surveyed forecast manufacturing to increase 6.8 percent in August.
Industrial Production
``Industrial production was affected by the earthquake, but if you look at the outlook, we needn't be too concerned,'' Economic and Fiscal Policy Minister Hiroko Ota said at a regular press conference in Tokyo.
Spending by households unexpectedly dropped for the first time in seven months, as a typhoon kept shoppers at home and a tax increase weighed on sentiment.
Employment prospects improved. The jobless rate fell to 3.6 percent in July, the lowest since February 1998, from 3.7 percent. A ratio that shows how many positions are on offer for each job seeker held at 1.07, near a 14-year low of 1.09.
``Steady improvement in the job market is a positive thing, but the question is when that's going to feed through to wages,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. ``The consumption data in July was affected by one-time factors, but the spending is decelerating.''
Tokyo Prices
Tokyo's core prices, seen as an indicator of the nationwide index, were unchanged in August from a year earlier, reversing two months of declines. Economists expected a 0.1 percent drop.
Atsushi Mizuno, a central bank board member, yesterday said prices probably hit bottom in March, when they fell 0.3 percent. The lone advocate for a rate increase since July said Japan's low borrowing costs contributed to the kind of excess lending that helped trigger the market turmoil.
``Mr. Mizuno has been set on raising rates for a long time,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. ``Our focus is on whether other board members get closer to his view.''
The government doesn't share the central bank's inflation outlook. Fukushiro Nukaga, who became Finance Minister in a Cabinet reshuffle this week, said the economy has yet to overcome deflation and the central bank should coordinate policy with the government to stop prices from falling and spur growth.
Rising crude oil prices are helping to slow consumer-price declines. The effect from a tobacco-tax increase in July 2006 was offset by recent gasoline price gains, said Takuji Aida, chief market economist at Barclays Capital in Tokyo.
``Inflationary pressure in Japan is steadily bubbling under,'' Aida said. ``The lava will surface suddenly, not gradually, and that's why interest rates need to be normalized'' soon. He said prices will resume rising in the fourth quarter.
