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Japan manufacturing output edges higher May, but housing starts lower as tax hike hits growth

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TOKYO - Mixed economic data for May suggests Japan's economy is continuing to slow after a sales tax increase at the beginning of the second quarter.

Government figures released Monday and last Friday showed that housing starts and household spending fell in May while industrial output grew less than expected.

Japan's economy was the one of the best performing in the industrial world in the first three months of the year, growing 6.7 per cent from the year before. But the April 1 increase in Japan's sales tax to 8 per cent from 5 per cent is expected to cause a contraction in the economy for the April-June quarter because demand has fallen off following a rush of purchasing to beat the tax hike.

Factory output in the world's third-largest economy climbed 0.8 per cent in May from a year earlier, and was up 0.5 per cent from the month before, the economy ministry reported. That was lower than most forecasts, but an improvement from a 2.8 per cent drop in April.

Higher output of machinery, cars and electronic devices accounted for most of the increase, the ministry said. Since manufacturers are reporting rising inventories, they are forecasting a decline in output in June before a further recovery in July and beyond, the report said.

Housing starts fell 15 per cent in May from the year before, the government reported. Construction starts have slowed since hitting a peak in October last year.

Much of the growth in demand before the sales tax was raised was attributed to construction of new homes. Now, many lots that were cleared of older structures last year remain idle due to the fall-off in construction. The tax increase is part of measures aimed at containing Japan's vast public debt.

Household spending fell 8 per cent in May, the sharpest drop in three years, following a surge in spending early in the year.

Assuming output falls as expected in June, Japan's manufacturing will likely contract 3.1 per cent in the April-June quarter, Marcel Thieliant, an economist with Capita Economics, said in a commentary Monday.

"The rise in industrial production in May suggests that the sector is recovering from the weakness caused by the consumption tax hike," he said.

Prime Minister Shinzo Abe has championed an economic strategy aimed at breaking Japan free of years of deflation. The theory is that companies and households will spend more now if they expect things to cost more in the future due to inflation.

Last week, Abe released the latest iteration of reforms he is proposing to help sustain growth and boost competitiveness, vowing to trim the country's massive public debt and spur companies to spend more and diversify their employment practices.

But for most families struggling to get by on incomes that have been falling since 1997, wages must rise to increase or keep purchasing power constant. Despite some of the biggest wage increases in years for employees of some of the biggest companies, such as Toyota Motor Corp., income of salaried households dropped a real 4.6 per cent from the year before in May, to an average 421,117 yen (about $4,160), the eighth straight monthly decline.

So far, wage increases have been mainly in limited categories of workers, most of whom are contract or freelance employees in areas such as trucking and construction.

While there are shortages of labour in some key industries, the recovery so far is not helping push base wages higher for workers as a whole. Similar to the "jobless recovery" in the U.S., Japan's rebound so far has mostly boosted the hiring of temporary or contract workers, as rising prices and tax hikes eat into consumer purchasing power.

The consumer price index climbed 3.4 per cent in May from a year earlier, the fastest increase since the oil shock in 1982, as 10 per cent higher rates for electricity and a hike in the sales tax pushed costs sharply higher.

The central bank estimates that about 2 per cent of the increase can be attributed to the increase in the tax rate to 8 per cent from 5 per cent.

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You can follow Elaine Kurtenbach on Twitter at: http://www.twitter.com/ekurtenbach

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