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Sales tax hike dents Japanese economy

Japan's nascent economic recovery stumbled in April with data Friday showing last month's sales tax rise punctured household spending, as the IMF called on Tokyo to press on with reforms aimed at ending decades of stagnation.

TOKYO: Japan's nascent economic recovery stumbled in April with data Friday showing last month's sales tax rise punctured household spending, as the IMF called on Tokyo to press on with reforms aimed at ending decades of stagnation.

The 13.3 per cent dive in spending, which followed a similar dip in retail sales, came as separate figures showed inflation surging and factory output slipping. The news will give the Bank of Japan a headache as it looks to kickstart growth and fend off deflation but keep price rises under control.

While the bank's monetary easing programme unveiled last year has had an impressive impact on the Japanese economy, BoJ policymakers have come under pressure in recent months to extend it as growth shows signs of levelling off.

Governor Haruhiko Kuroda has repeatedly said he is ready to expand the stimulus if necessary but the bank has so far held off any such move, saying it would assess the impact of the sales tax rise.

The loose monetary policy is part of a three-pronged drive by Prime Minister Shinzo Abe to defeat years of deflation and reinvigorate the economy. Abe has also embarked on a huge spending drive while he also plans a series of structural reforms.

But critics have derided the BoJ's moves as a risky money-printing exercise and there is increasing scepticism over its target to reach a steady 2.0 per cent inflation rate by next year.

The data Friday showed inflation surged to 3.2 per cent from a year ago, the fastest pace in nearly a quarter of a century and well up from the 1.3 per cent in March. Prices rose 1.5 per cent excluding the tax rise.

However, the International Monetary Fund urged Tokyo to stick to its guns, saying in its annual review of Japan's economy on Friday: "The current aggressive pace of monetary easing may need to be maintained for an extended period."

The "BoJ should act quickly if actual or expected inflation stagnates or growth disappoints", it added.

It also called on the government to launch deeper economic reforms -- including free-trade deals and more flexible labour markets -- to protect the recovery.

Abe has made some changes, including a bid to deregulate the energy sector. But it was unclear if he would make good on a wider overhaul that was sure put him on a collision course with the agricultural sector and other politically powerful groups.

"The sustainability of the recovery over the medium term is at risk," the IMF report said, adding that "more forceful reforms are needed".

Public sentiment could also emerge as a major sticking point to change with household budgets squeezed by higher prices.

Friday's household spending data for April showed the biggest monthly fall since March 2011 when Japan was hit by a quake-tsunami disaster and Fukushima nuclear crisis.

On Thursday figures showed retail sales plunged 13.7 per cent on month in April, after as shoppers made a last-minute dash in March to buy staples and big-ticket items such as cars and refrigerators before the hike.

The increase, the first in 17 years, was seen as crucial to tackling the country's massive national debt but some warned it would nip a slow recovery in the bud.

Also Friday, the economy ministry announced activity in the nation's factories contracted 2.5 per cent in April, adding that output appeared "flat" -- reversing its month-earlier assessment that activity was picking up.

"As further decline in consumption due to April's tax hike is likely, I believe output will fall further," said Takeshi Minami, chief economist at the Norinchukin Research Institute.

A sharp decline in the yen last year boosted profitability among major exporters and sparked Japan's biggest annual stock market rally in more than four decades. The economy logged its strongest growth in over two years during the first quarter of 2014.

There was some brighter news Friday, with the jobless rate hitting a near seven-year low of 3.6 per cent, reflecting strong demand in the construction industry for workers on disaster rebuilding projects and venues for the 2020 Olympics in Tokyo.

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