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Japan factory output slips ahead of tax hike decision

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    Workers assemble the front bumper of a Toyota compact hybrid vehicle at the Kanto Auto Works plant in Kanegasaki town, on March 9, 2012 (AFP/File)

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    Shinzo Abe, Prime Minister of Japan at the United Nations headquarters in New York on September 26, 2013 (/AFP/File)

Japan's factory output slipped more than expected in August but the government put an upbeat gloss on the data Monday, a day before Premier Shinzo Abe issues his long-awaited decision on hiking sales taxes.

Tepid export and consumer demand at home weighed on industrial production last month, with output falling by 0.7 percent from the previous month.

The drop -- reversing a 3.4 percent rise in July -- is one of the last pieces of economic data that Tokyo will be able to study before issuing a decision Tuesday on whether to raise the sales levy, a move some fear will derail Japan's fledgling economic recovery.

Also due Tuesday are household spending data and the Bank of Japan's quarterly Tankan survey, a widely watched indicator of confidence in the corporate sector.

Analysts were mixed on the fresh factory output figures, with Junko Nishioka, chief economist at RBS Securities Japan, noting that the country's export picture was lacklustre.

"Exports aren't growing strongly these days," she told Dow Jones Newswires.

"The pace of production improvement isn't as fast as those seen in economic recoveries in the past."

However, Credit Suisse said that "the fall in August seems a temporal adjustment, and manufacturing activities is likely to remain on a recovery trend".

For its part, the trade ministry painted the latest output figures in an optimistic light, keeping its previous verdict that industrial production "shows signs of picking up a moderate pace" -- the same language it used in July.

A corporate survey included in the data published Monday showed Japanese manufacturers have a bright outlook with the sector expecting a 5.2 percent expansion this month and 2.5 percent in October.

Early signs suggest Abe's blueprint for stoking growth -- dubbed "Abenomics" -- is having a positive effect, with the world's third-largest economy expanding again in the June quarter as cautious firms hiked their capital spending.

But his decision on hiking the tax levy to 8.0 percent from the current 5.0 percent, seen as crucial to chopping Japan's massive national debt, threatens not only to sink Abe's growth plans; it could also dim his popularity with voters.

Few, however, see the 59-year-old as having much choice, given the size of the country's national debt, proportionately the worst in the rich world at more than twice the size of the economy.

The International Monetary Fund, among others, have been calling on Tokyo to fix its books, after debt agencies cut their ratings on Japan's credit.

Some expect the BoJ's closely watched Tankan survey to hit a three-year high, possibly the tipping point that will give the premier the green light to implement a tax rise that was passed by the administration he booted out of office.

In a bid to soften the impact, Abe is expected to unveil a one-time $50-billion stimulus package with benefits for low-income earners and corporate incentives to boost investment.

A cut to the corporate tax rate is also reportedly in Tokyo's sights, although the timeline remains unclear.

If Abe does follow through on the tax hike, as expected, all eyes will turn to the Bank of Japan to see if its expands its massive monetary easing drive to counter any downturn from the higher levy.

The scheme launched in April by the BoJ, which holds a policy meeting later this week, formed a key part of Tokyo's bid to reflate Japan's sagging economic fortunes.

It also set a target of reaching two-percent inflation by 2015, an ambitious goal to reverse falling prices which have dragged on growth for years.

Data published Friday showed that Japanese inflation rate hit a five-year high in August, but the rise was driven by soaring energy costs rather than a broad-based jump in prices, suggesting government's plan to boost consumer demand was still to gain traction.