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Japan economy in doldrums, as incomes and spending languish

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TOKYO - Japan's vital signs remained weak in July as wages fell further and household spending dropped, signalling continued weakness in the world's third-largest economy.

Data released Friday showed the inflation rate was unchanged from the previous month. The core price consumer index that excludes volatile fresh food prices rose 3.3 per cent in July, the same as a month earlier. Much of the increase stems from a 2 percentage point increase in Japan's sales tax in April, which has since sapped much of the steam from the country's economic recovery.

Under Prime Minister Shinzo Abe, the government and central bank have sought to spur inflation on the premise that it would goad businesses and consumers into spending more instead of saving money in anticipation the Japan's deflationary spiral will guarantee lower prices in the future.

That strategy, dubbed "Abenomics," has made some headway in ending the long spell of deflation that slowed growth for much of the past two decades. But headline inflation remains below the official target of 2 per cent, excluding the boost from the tax hike, and so far there are only scant signs of the desired "virtuous cycle" of higher corporate spending to sustain growth in the long term.

Real incomes fell 6.2 per cent in July from a year earlier and the unemployment rate edged higher to 3.8 per cent from 3.7 per cent in June. Softness in the labour market would counter any moves toward higher wages that might help spur more consumer demand.

The economy contracted by 6.8 per cent in the April-June quarter, following a surge early in the year as businesses and families stepped up buying ahead of the tax hike, which raised the consumption tax to 8 per cent from 5 per cent. The government plans extra stimulus spending to counter the tax hike's lingering effects.

Industrial production rose slightly in July, by 0.2 per cent from June, but was down 0.9 per cent from a year earlier in seasonally adjusted terms, the Ministry of Trade and Industry reported.

"Today's data on industrial production and retail sales show that the economy continued to stagnate at the start of the third quarter," economist Marcel Thieliant of Capital Economics said in a commentary.

Although a survey showed companies expect output to increase in August and gain further momentum in September, "these forecasts have tended to overestimate the future pace of expansion in the past," he said.

Bank of Japan Gov. Haruhiko Kuroda told fellow central bank chiefs earlier this month that the BOJ plans to continue its "extremely accommodative monetary stance" until inflation has risen to the bank's 2 per cent target. He said the bank's support could be expanded if necessary.

With inflation "running out of steam," growth is likely to moderate even after the recovery resumes as expected in coming months, Credit Agricole said in a research note.

It said that rising inventories "will weigh on the recovery of production into months ahead."

Kuroda and other experts have urged Abe's government to push ahead on structural reforms needed to help Japanese industries regain their competitiveness and counter the stagnating effects of the rapid aging and shrinking of Japan's population.

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