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Is the Japanese Economy in Recovery?

The concern is that the country's tentative recovery has been knocked off kilter by the increased tax levy imposed in April and strengthen the hand of those arguing against another hike next year.

The answer to that question seems to be heading towards no.

Last month factory output saw a surprising drop while household spending dropped as well.  These disappointing statistics are fanning fears about the impact of April's sales tax rise on the economy.

The concern is that the country's tentative recovery has been knocked off kilter by the increased levy and strengthen the hand of those arguing against another hike next year.

Industrial production shrank 1.5% month-on-month in August after rising 0.4% in July, the ministry of economy, trade and industry said.

The latest reading also missed a market median forecast of a 0.3% rise.

Separate data from the internal affairs ministry showed household spending in August fell a steeper-than-expected 4.7% from a year earlier.

Spending has now fallen for five straight months since the government pushed up sales tax from 5% to 8%.

The latest fall was sharper than the market forecast of a 3.6% drop and came after a 5.9% plunge in July.

Yet more weak data are likely to force policymakers to take a hard look at the state of the economy.

The government and central bank leaders have argued the world's third largest economy remains broadly on a recovery path and has withstood a temporary shock from the tax rise.

But that position is getting harder to defend, say observers.

"There is no sign at all of a V-shaped economic recovery previously forecast by the government," said Norinchukin Research Institute chief economist Takeshi Minami.

Decline in Real Wages

Demand for durable goods remains weak, compounded by a buying spree ahead of the tax hike, and "as far as demand for services and non-durable items is concerned, people are keeping a tight grip on their wallets because of a continued decline in real wages", he told Dow Jones Newswires.

Marcel Thieliant, economist at Capital Economics, said in a note that Tuesday's data "are unlikely to dispel concerns about the pace of recovery from last quarter's slump."

A rebound in industrial production in September is likely but manufacturing companies predict yet another month-on-month decline of 0.2% in October, he noted, citing a survey by the industry ministry.

The one ray of light for the government is that unemployment remains low, with the jobless rate falling to 3.5% in August from 3.8% in July.

But Thieliant warned "the weakness in output since the beginning of the year will take its toll on the job market in coming months."

"Accordingly, we expect the unemployment rate to climb to 4% by the end of the year," he said.

Investors are now waiting for the Bank of Japan's release Wednesday of its quarterly Tankan business sentiment survey.

Retail sales had surged ahead of the April 1 sales tax rise -- Japan's first in 17 years -- as shoppers made a last-minute dash to buy staples such as rice and toilet roll, as well as big-ticket items such as cars and refrigerators.

But spending turned down right after the levy hike, weighing on activity and exacerbating worries that the higher tax would crimp consumer spending and hamper a wider economic recovery.

The tax rise was seen as crucial for shrinking Japan's mammoth national debt, proportionately the worst among wealthy nations.

Policymakers are expected to decide by the end of the year on whether to go ahead with earlier plans to raise sales taxes again next year.

Copyright Agence France-Presse, 2014

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