Japan retail sales slow in July, still top expectations

By Stanley White

TOKYO (Reuters) - Japan's retail sales growth slowed in July as shoppers spent less on clothes and cars, but economists remain optimistic that consumer spending will soon gather pace due to a tight labour market.

Separate data on Tuesday showed household spending unexpectedly fell in July, which has injected some caution into the debate about whether domestic demand can continue to drive growth.

Nonetheless, retail sales did grow for a ninth consecutive month in July, suggesting the underlying trend for consumption remains healthy.

Some economists say retail sales could fall in August as heavy rains kept people indoors. Spending is likely to quickly resume growth as strong labour demand boosts consumer sentiment, economists say, although tensions with North Korea may undermine that confidence.

"Retail sales can remain in gradual recovery, but it is difficult to maintain the high pace of growth seen earlier this year," said Norio Miyagawa, senior economist at Mizuho Securities.

"The weather in August was not good. However, I'm not pessimistic because the labour market is tight."

Retail sales rose 1.9 percent in July from a year ago, which was more than the median estimate for a 1.0 percent annual increase but still slower than a revised 2.2 percent increase in the year to May.

Spending on clothes rose 3.5 percent in July from a year ago, which was slower than a 5.3 percent annual increase in June, data from the trade ministry showed on Wednesday.

Spending growth on cars also slowed to an annual 6.6 percent in July from 8.7 percent in the previous month.

Demand for labour rose to the highest in 43-1/2 years in July, data showed on Tuesday, supporting optimism in the outlook for domestic demand.

North Korea's launch of a missile over Japan in the early hours of Tuesday rattled financial markets and could start to weigh on Japan's consumer sentiment if the standoff over its nuclear programme worsens.

(Reporting by Stanley White; Editing by Eric Meijer)