Japan's central bank mulls policy as industrial output, wages fall short of forecasts

Japan's central bank met Wednesday to assess the status of the country's economic recovery, as monthly data showed industrial output and wage growth falling short of expectations.

Economists are not expecting an immediate move by the Bank of Japan to relax already ultra-loose monetary policy following an April 1 tax hike that is likely to sap growth as consumers adjust to higher costs.

But pressure for more action is building with signs the recovery was weaker than expected ahead of the tax hike.

Prime Minister Shinzo Abe's formula of strong government spending and lax monetary policy helped the economy emerge from a long deflationary slump, but further measures are needed to sustain growth in coming years.

Abe has promised tax cuts and other measures to encourage more corporate investment, but has not yet pushed through major reforms promised as part of his "growth strategy."

The government said industrial output rose 0.3 percent in March from the month before, better than the 2.3 percent decline in February but still meager given the jump in retail sales before the tax hike took effect.

Base wages fell 0.4 percent from a year earlier, though bigger bonus payments pushed cash earnings up 0.7 percent in March from a year earlier.

About a year ago, the central bank and government jointly set a target of achieving 2 percent inflation within about two years. A weakening of the Japanese yen in late 2012 helped boost prices for imported energy and other goods, aiding that effort, and Japan's core inflation rate, excluding fresh food, was 1.3 percent in March. Excluding energy costs it was 0.7 percent.

But higher prices are a burden for consumers whose wages have stagnated or fallen for years.

"Incomes are not expanding fast enough to offset high inflation," said Marcel Thieliant of Capital Economics. "While incomes may get some support from the spring wage negotiations, the effect is unlikely to be large."

Japan's largest trade union federation, Rengo, has negotiated an average base wage increase of almost 2,000 yen ($20) a month, the biggest increase in years. But the group represents only one-in-10 workers.

"The upshot is that if consumers want to maintain their current living standards they will need to continue running down their savings," Thieliant said in a commentary.

Japan's industrial output rose nearly 3 percent in the first three months of the year, and employment conditions have improved, the latest figures show. But increasing purchasing power is key to spurring enough demand to encourage companies to increase investment at a time when the population is both shrinking and aging.


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