Japan's economy took baby steps forward in December as unemployment eased and factory output rose.
It could not, however, shake off a troubling combination of falling prices and wages that only worsened during the month and threatens to hamstring recovery.
The government released a slew of data Friday that offered both hope and uncertainty for the world's second biggest economy. While Japan appears unlikely to fall into recession again — as some have feared — it faces a murky future under entrenched deflation.
"The bottom line is that a double dip is unlikely in Japan," said Kyohei Morita, chief economist at Barclays Capital in Tokyo. "That's mainly because corporate activity is not that weak. Exports have been rising, which has resulted a pickup of production activity, which we hope will translate into a pickup in capex this year."
Industrial production climbed 2.2 percent in December from the previous month, powered by a pickup in exports. The result just missed Kyodo News agency's forecast for 2.3 percent growth in its survey of economists.
The trade ministry expects factory production to rise 1.3 percent in January and 0.3 percent in February.
Earlier this week, government figures showed that robust Asian demand in December fueled the first expansion in Japan's exports in 15 months.
There was also a small improvement on the jobs front. The nationwide unemployment rate fell to 5.1 percent in December — better than 5.2 percent in November, though still high by Japanese standards.
The average ratio of job offers to job seekers stood at 0.46, a tad higher than 0.45 a month earlier. The figure means there were 46 offers for every 100 job seekers.
Household spending posted a solid rise in December, up 2.1 percent from a year earlier. The figure represents a key indicator of private consumption, which accounts for about 60 percent of Japan's economy.
Despite the better jobs numbers, reaction from officials and analysts was far from jubilant.
"The rate improved slightly," Prime Minister Yukio Hatoyama told reporters, according to Kyodo. "But it is far from giving grounds for optimism."
Goldman Sachs economist Chiwoong Lee warned that export-driven progress may not necessarily last.
"A sustained pace of improvement in external demand is by no means assured, and companies have become cautious in their stance," Lee said in a note to clients. "This is not fertile ground for a strong labor market turnaround."
Deepening deflation further complicates Japan's outlook.
Prices and wages continued to fall in December with core consumer prices falling 1.3 percent from a year earlier, the government said.
The key consumer price index, which excludes volatile fresh food prices, has now fallen for 10 straight months. The reading matches Kyodo's market forecast.
Lower prices may seem like a good thing, but deflation plagued Japan during its "Lost Decade" in the 1990s. It can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.
Core CPI for the Tokyo area, seen as a barometer of price trends nationwide, retreated 2 percent in January. For the 2009 calendar year, core CPI retreated 1.3 percent, according to the Ministry of Internal Affairs and Communications.
Lower prices and wary companies have led to dwindling wages. Average monthly household income fell 4.8 percent in December from a year earlier, the ministry said.
Morita of Barclays Capital expects consumers to spend less in the months ahead as wages slide and consumer incentives implemented by the previous government run their course.
Japan's recovery should strengthen if exports remain robust and the new government can effectively implement policy, such as cash handouts for families with children, he said.
Hatoyama's Democratic Party of Japan swept into power last summer promising more support for struggling workers and families. Lawmakers this week passed a stimulus package with $80 billion yen in spending on steps to bolster employment and help small and medium-size firms hurt by a strong yen.
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