Japan's Consumer Prices Fall 0.1%; Production Drops After Quake

By Mayumi Otsuma

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.

U.S. Economy: Expansion Was Faster Than Estimated (Update3)

By Courtney Schlisserman

Aug. 30 (Bloomberg) -- Surging exports and business spending propelled U.S. growth to the fastest pace in more than a year before turmoil in the credit markets forced the Federal Reserve to warn of a bleaker outlook.

Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.

The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign the job market is weakening, the Labor Department said today claims for unemployment benefits climbed to the highest level since April. A further report showed house prices in the second quarter rose at the slowest pace in a decade.

``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.

Kretzmer accurately predicted the pace of expansion.

The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.

Treasury notes remained higher after the reports. The yield on the benchmark 10-year note declined 5 basis points to 4.51 percent at 5:07 p.m. in New York. A basis point is 0.01 percentage point. The Dow Jones Industrial Average fell.

Trade Deficit

A bigger jump in exports and smaller gain in imports contributed to a reduction in the trade deficit, the report on gross domestic product showed. Trade contributed 1.4 percentage points to growth, the most since 1996.

Spending on corporate construction projects and new equipment also boosted growth. Commercial construction jumped 28 percent, the most since 1981. Investment in equipment increased at a 4.3 percent pace, almost double the previous estimate.

Inventories, which were forecast to play a role in the projected increase in growth, were little changed from the initial GDP estimate published in July.

Jobless Claims

Initial unemployment claims climbed by 9,000 to 334,000 in the week that ended Aug. 25, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, increased to 324,500 from 318,250.

Help-wanted advertising in American newspapers fell in July to the lowest level since 1958, and online job postings also declined. The Conference Board's index dropped to 25 last month, matching analysts' forecasts, from 26 in June. The trend in the help-wanted measure has fallen since 2000 as print media have been losing advertising to the Internet.

The deepest housing slump in 16 years is prompting builders and mortgage-lending companies such as American Home Mortgage Investment Corp. to fire workers. That may weigh on consumer spending, which accounts for more than two-thirds of the economy.

``Business psyche is being more and more affected by what's been going on in the credit markets,'' said Zoltan Pozsar, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``If this continues for the next few weeks, it'll definitely be a sign that hiring is being affected by the credit- market problems.''

Home Prices

Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier, the smallest gain since 1997, the Office of Federal Housing Enterprise, said today in Washington. Prices gained 0.08 percent from the first quarter, the slowest since a decline in the final three months of 1994.

About 14 percent of banks raised standards for mortgages to their most creditworthy borrowers and 56 percent made it more difficult for people with limited or tainted records to get loans, according to a Fed survey of senior loan officers in mid- July.

In highlighting risks to growth, policy makers reversed their stance from their last meeting on Aug. 7 that inflation was the biggest risk to the economic expansion.

Traders and economists expect the Fed to lower its benchmark overnight lending rate between banks at or before policy makers next meet on Sept. 18. Chairman Ben S. Bernanke will discuss housing and monetary policy tomorrow, when he addresses the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.

Residential Construction

Declines in residential construction subtracted 0.6 percentage point from growth in the second quarter, more than previously estimated.

Housing will probably deduct about a percentage point from GDP at least through early 2008, according to economists at JPMorgan Chase & Co.

As a result, growth will average 2.25 percent in the six months starting in October, a percentage point less than previously projected, Bruce Kasman, JPMorgan's chief economist, said in a note to clients last week.

Lehman Lowers Forecast

Lehman Brothers Holdings Inc. lowered its forecast last week for the period covering October through June 2008 to 1.8 percent, almost a half percentage point less than previously thought.

In one of the earliest economic readings to cover August, consumer confidence dropped by the most in two years, the Conference Board said this week. The measure retreated to 105 this month and the share of people who said jobs are plentiful declined.

In today's report, consumer spending was revised up to an annual rate of 1.4 percent from an initial estimate of 1.3 percent. The gain was still the smallest in a year.

``Our consumer is impacted obviously because they see the value of their homes go down, there's a sort of wealth effect,'' Farooq Kathwari, chief executive officer of Ethan Allen Interiors Inc., said in an interview on Aug. 28. ``Yet they're still interested in furnishing their homes, they're still buying.''

Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 6.4 percent, the most in more than a year, to an annual rate of $1.65 trillion. Compared with a year earlier, profits were up 4.5 percent.