Japan's unemployment rate ticked higher while production of automobiles and electronic gadgets saw a surprise slip in June, data showed Friday, in signs that an export-driven recovery may be stalling.
The data poses a challenge for Prime Minister Naoto Kan's government, which must balance Japan's uncertain economic reality with an agenda that has placed cutting the industrialised world's biggest public debt at its core.
Shipments of cars, gadgets and components have been crucial in offsetting a weaker demand picture back home, but concern is mounting that Beijing's efforts to cool China's economy and doubts over eurozone and US demand may hit Japan.
The planned expiry of government incentives to purchase cars may also weigh on production for the domestic market as the overseas climate worsens, analysts say. Incentives to buy energy-efficient vehicles are due to end in September.
"Clearly, the recovery has slowed down, particularly since the January-March quarter," said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo.
"We are seeing exports gradually become more sluggish, made worse by the receding effects of stimulus programmes."
Unemployment rose to 5.3 percent in June, the highest level since November and missing market expectations of 5.1 percent, in an illustration of the headwinds faced by the world's second-largest economy.
And industrial output surprised the market by falling 1.5 percent in June from the previous month, missing expectations of a 0.l percent rise.
"With production turning softer, the general recovery will possibly weaken toward the end of the year," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
Some of Japan's biggest companies recently posted strong quarterly profits as demand picks up from the lows hit during the financial crisis, but economic uncertainty has led to a strong yen, threatening future earnings, analysts say.
"A strong yen could pressure exports in the future," said Shinke. "And if slowdown worries over the US economy increase, this may lead to slowdown of exports, which would weigh on production."
Sony on Thursday lifted its annual profit outlook by 20 percent to 60 billion yen but warned of possible risks in the future posed by the yen's strength, forcing the electronics giant to reevaluate its currency forecasts.
But Nintendo fell into the red with a net loss of 25.2 billion yen, as a strong Japanese currency hurt its overseas operations. Sales outside Japan make up 87 percent of its total.
However, other data showed some glimpses of sunlight for the economy which, despite remaining mired in deflation, saw the rate of decline in consumer prices ease for the second month in a row.
Japan's core consumer price index fell 1.0 percent in June from a year earlier, marking the 16th straight month of decline as deflation continues to drag on recovery, with lower prices biting into corporate profits.
But the drop in core prices, which exclude volatile fresh food prices, was slightly smaller than market expectations of a 1.1 percent decline.
The core CPI figure slid 1.2 percent in May and 1.5 percent in April.
And core CPI in the Tokyo area in July -- considered to be a leading indicator of nationwide price trends -- fell 1.3 percent on-year, suggesting that the rate of decline nationwide may pick up in the next few months.
But in a sign domestic demand may be rising, average household spending in June was 0.5 percent higher on-year and 2.9 percent higher than in May.
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