Japan's War On Deflation Gets A Boost As Consumer Prices Rise At Their Fastest Pace In 5 Years

Japan's war on deflation got a boost last month with a key inflation indicator rising at its fastest pace in 15 years, new data showed on Friday, as Tokyo battles to reverse years of falling prices.

Stripping out volatile food and energy prices, which have largely driven recent increases, prices inched up 0.6 percent in November, the country's best result since August 1998.

The broader consumer price index, which measures a basket of everyday goods but excludes the cost of fresh food, rose 1.2 percent last month from a year earlier, the fastest pace in five years.

Prime Minister Shinzo Abe's government has put conquering deflation and stoking growth in the world's third-largest economy at the top of its agenda with a policy blitz dubbed "Abenomics".

The upbeat headline for Friday's inflation data was tempered by the fact that prices were still largely driven up by higher fuel bills, not surging demand for everyday goods such as vacuum cleaners and clothes which power the economy as a whole.

Electricity bills jumped a hefty 8.2 percent, the data showed, as Japan's energy costs soar in the wake of the 2011 Fukushima atomic disaster, which forced the shutdown of the nation's nuclear reactors.

Since the accident, Japan has been importing fossil fuels to plug the energy gap, a pricey option that has become even more expensive as the yen sharply weakened in the wake of the Bank of Japan's unprecedented monetary easing drive.

Friday's data showed prices moving towards the BoJ's ambitious two-percent inflation target -- to be reached in just two years.

While deflation may sound like a good thing for shoppers, it can be bad for growth because falling prices encourage consumers to put off spending, knowing they will pay less for a product if they wait.

That makes it difficult for companies to invest and discourages them from hiking wages, which, in turn, reduces consumer spending further.

Despite Abe's much-lauded start since sweeping national elections a year ago, analysts have been warning that Tokyo's bold pro-growth programme -- a mix of big government spending and central bank monetary easing -- is not enough on its own without promised economic reforms.

And getting Japan's notoriously thrifty households to spend more is a key part of Abe's drive, as are yet-to-be-seen widespread wage rises.

That was in evidence Friday with separate data showing Japan's household spending inched up 0.2 percent in November, well below market expectations, as consumers get ready for a sales tax hike next year.

Japan's factory output, meanwhile, expanded by a weaker-than-expected 0.1 percent in November, while the unemployment rate held steady at 4.0 percent.

Last week, the BoJ held off fresh policy measures to stimulate growth,saying that the economy was "recovering moderately" while its efforts to stoke inflation were taking hold.

But Japan's economic growth slowed markedly in the July-September quarter -- after leading G7 nations in the first half of the year -- as exports weakened and consumer spending slowed.

Abe's big test will be key reforms, including loosening rigid labour laws and signing wide-ranging free trade deals, seen as crucial for a lasting turnaround.

Legislators have passed a bill that paves the way for an opening up of the electricity sector and Abe is pushing through a bid to strip away protections for the agricultural sector, but it remains to be seen if deeper reforms are in the offing.