Japan continues to recover, but still in deflation

The Japanese economy continues to show signs of recovery.

Industrial production rose 1.5 percent in June from the previous month. A Ministry of Economy, Trade and Industry survey, however, showed that manufacturers' output is expected to fall 0.2 percent in July but rise 1.9 percent in August. Significantly, the NTC Research/Nomura/JMMA Purchasing Managers Index rose to a seasonally-adjusted 54.1, the highest reading since last August.

In addition, the seasonally-adjusted unemployment rate fell to 4.2 percent in June, the lowest since July 1998, indicating that consumption is likely to stay strong.

As it is, average spending by Japanese wage earner households rose a real 0.1 percent in June from a year earlier. Household spending had fallen 2.0 percent in May and 3.1 percent in April.

This improvement corroborated yesterday's report that retail sales grew 3.1 percent in June from a year earlier. Sales by wholesalers gained 2.1 percent.

Housing starts rose 2.4 percent in June from a year earlier

Less positive is that Japan's recovery from deflation appears to be stalling. The nationwide core consumer price index (CPI), which excludes volatile fresh food prices, fell 0.2 percent in June from a year earlier. The core Tokyo CPI fell 0.4 percent in July from a year earlier. Both were worse than economists' forecasts.