Japan seen beating deflation; govt says prices 'rising moderately'

Japan's government described consumer prices as "rising moderately", using that wording for the first time since October 2008, a sign that the economy is making steady progress towards exiting 15 years of stubborn deflation.

The government, in its monthly economic report on Wednesday, stopped short of declaring victory in its battle against deflation. But officials said signs that price rises are spreading justified the more upbeat description.

The assessment, following a similar view on Tuesday by the Bank of Japan, comes even as the world's third-biggest economy grows less than expected and faces headwinds from a looming sales-tax increase.

Growth stagnated in the fourth quarter at an annualised 1.0 per cent rate, a tick slower than the third quarter and well below forecasts of 2.8 per cent, weighed by weak exports, private consumption and capital spending. This followed a big monthly drop in machinery orders, a leading gauge for business investment.

One of Japan's key trading partners and closest political allies, the US, expressed concerned about the outlook. "Japan's economy has been largely driven by domestic demand over the last two years, but the outlook for domestic demand has clouded," Treasury Secretary Jack Lew said in a letter, obtained by Reuters on Tuesday, to the Group of 20 big industrial and developing powers. Nonetheless, Japan's Cabinet Office said in the monthly report that the economy is "recovering moderately," backed by private consumption and pickup in capital spending.

"The fourth quarter growth undershot the market forecast but it still exceeded Japan's potential growth rate, so it's appropriate to describe the recovery as moderate," said an official in charge of compiling the report.

Analysts say the success of Prime Minister Shinzo Abe's strategy, which has got the economy motoring on a cocktail of hefty fiscal spending and monetary expansion, will depend on companies sustainably raising wages and spurring consumption and business investment.

In last month's report, the government described prices as holding firm. In December, the report dropped the word "deflation" for the first time in four years. The last time it said consumer prices were rising moderately was in 2008, when Japan faced commodity-driven inflation.

In Wednesday's report, the government said the economy is expected to remain on a recovery trend, while citing risks from overseas economies and any decline in demand after the increase in the national sales tax.

The government raised its view on exports - reflecting rising car shipments to Russia and West Asia - saying they are "flat". Last month, it described shipments as "weakening".

The text reiterates a statement from previous reports that the government expects the BoJ to achieve its 2 per cent inflation target at the earliest possible time. Many private economists are sceptical that the central bank can hit that target.

The BoJ maintained its expansionary monetary policy on Tuesday and extended special loan programs to help buoy economic growth. BoJ Governor Haruhiko Kuroda said the recovery remains on track.

Core consumer prices, excluding fresh food but including energy costs, rose 1.3 per cent in December from a year earlier, posting its fastest annual gain in more than five years.

In a further sign of broadening price increases, the "core-core" inflation index, which excludes food and energy prices and is similar to the core index used in the United States, rose 0.7 percent, matching a high last hit in August 1998.