Japan's expansion may come to an end

By Mayumi Otsuma  |   2008-6-28  |     NEWSPAPER EDITION

JAPAN'S household spending slumped in May, the ratio of jobs available fell to a three-year low and the inflation rate almost doubled, signaling the economy's longest postwar expansion may be over.

Household spending declined 3.2 percent, the most since September 2006, the statistics bureau said yesterday. Core consumer prices, which exclude fruit, fish and vegetables, rose 1.5 percent from a year earlier after gaining 0.9 percent in April.

The Nikkei 225 Stock Average slid to a two-month low on concern that global demand for Japanese cars and TVs is being curbed by record crude prices. Bonds gained because the risk of a recession may prevent the Bank of Japan from raising its key interest rate from 0.5 percent even as inflation accelerates.

"We're clearly seeing that the household sector is being severely damaged by the weaker job market and rapid inflation," said Takahide Kiuchi, chief economist at Nomura Securities Co. "Japan's economy is likely to contract in the second quarter."

The government downgraded its assessment of industrial production even after a report yesterday showed output rose 2.9 percent in May from April, the first climb in three months. Production is showing signs of weakness because of higher energy costs and weakening global demand, the Trade Ministry said.

Serious challenge

The Nikkei slid 2 percent, the seventh daily drop, capping off the worst losing streak in seven months. Government debt completed the longest rally since November 2006, pushing the yield on the 10-year bond 4 basis points lower to 1.615 percent. The yen has lost 6.8 percent against the US dollar in the past three months and traded at 106.89 from 106.88 before the reports.

"With the economy slowing, the central bank cannot raise interest rates anytime soon," said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp.

The Group of Eight finance ministers said this month that record food and fuel costs pose a "serious challenge" to global growth. The US Federal Reserve alluded to the risk of faster inflation when it kept interest rates on hold this week. In Japan, higher prices for steel, rubber and aluminum have increased production costs at companies including Nissan Motor Co.