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TOKYO: Japan said Friday core inflation hit a fresh decade high in July while consumers spent less for a fifth straight month as the country's longest post-war expansion grinds to a halt.
But there were hopes that inflation may have peaked following the recent drop in world oil prices, which could ease the pressure on consumer spending and corporate profits, two key pillars of Asia's largest economy.
Japan's core inflation rate surged to an annualised pace of 2.4 per cent in July from 1.9 per cent the previous month on the back of soaring energy and raw material costs, official data showed.
It was the 10th straight monthly increase in core consumer prices and the sharpest rise since October 1997 when inflation hit 2.4 per cent.
Japan was stuck in a deflationary spiral for years, but the return of inflation has sparked concern as it is being driven entirely by rising import costs rather than a stronger domestic economy.
"It's depressing consumer sentiment," said Lehman Brothers economist Hiroshi Shiraishi. "People still are used to deflation and now they're starting to see the prices of their daily necessities going up sharply."
Excluding the impact of a sales tax hike in 1997, inflation was the fastest since June 1992, when prices went up 2.5 per cent.
The fear is that rising prices will dampen already tepid consumer spending, which dropped by 0.5 per cent in July from a year earlier, down for a fifth straight month, separate figures showed.
Retail sales, however, rose 1.9 per cent in July from a year earlier as consumers paid more for gasoline and food.
In a sign that price pressures may ease, core inflation in Tokyo, a leading indicator released a month earlier than the nationwide figures, slowed to 1.5 per cent in August from 1.6 per cent in July, the government reported.
"Looking ahead the contribution from high energy prices should diminish," said Shiraishi, who thinks inflation will slow in the second half of the year.
Snapshots of the rest of the economy were less gloomy. The unemployment rate dipped to 4.0 per cent in July from 4.1 per cent the previous month, while industrial production unexpectedly edged up 0.9 per cent in July.
Production is expected to fall by 2.9 per cent in August but increase 3.4 per cent in September, the government said based on a survey of manufacturers.
Until recently Japan's economy, the second largest in the world, had been recovering from a slump stretching back more than a decade.
But a contraction in the second quarter of this year has left the country teetering on the brink of its first recession in six years.
Japan's government, which has effectively declared an end to the country's longest post-war economic expansion, was expected to unveil later in the day a package of economic measures to ease the pain of soaring energy costs.
According to local media, the pump-priming measures could be worth as much as 10 trillion yen (US$91.4 billion), mostly in the form of loan guarantees for small businesses rather than fresh government spending.
Ministers have also stressed the need to tackle Japan's huge public debt, which is the highest among industrialised nations after a series of massive emergency spending packages during the recessions of the 1990s.
- AFP/yb
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