Jun 30, 11:01 PM EDT

Japan May data show economy slowing but resilient


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TOKYO (AP) -- Japan's economy is slowing following a sales tax hike but not as badly as some economists feared, according to two business surveys released Tuesday.

The central bank's quarterly business confidence survey showed sentiment falling for the first time in 18 months in April-June. But the decline in the index, to 12 from 17 in March, was less than feared.

The index, which is a measure of the percentage of companies reporting positive conditions versus those reporting negative conditions, is expected to rise to 15 in September.

Demand has waned following a rush of purchasing to beat the tax hike. Automakers and retailers were the industries hardest hit by the April 1 increase in the sales tax to 8 percent from 5 percent.

Meanwhile a monthly manufacturing index by Markit Economics showed an improvement to 51.5 in June from 49.9 in May. A reading above 50 shows expansion in activity as seen by purchasing managers.

"The implementation of the sales tax in April looks to have had only a temporary effect on Japanese manufacturers," said Amy Brownbill, an economist at Markit. But she noted that employment growth slowed for the first time since October.

Other data released earlier showed that housing starts and household spending fell in May while industrial output grew less than expected.

Japan's economy was the one of the best performing in the industrial world in the first three months of the year, growing 6.7 percent from the year before. The tax hike is expected to cause a contraction in the economy for the April-June quarter.

Housing starts fell 15 percent in May from the year before, the government reported. Construction starts have slowed since hitting a peak in October last year.

Much of the growth in demand before the sales tax was raised was attributed to construction of new homes. Now, many lots that were cleared of older buildings last year remain idle due to the fall-off in construction. The tax increase is part of measures aimed at containing Japan's vast public debt.

Household spending fell 8 percent in May, the sharpest drop in three years, following a surge in spending early in the year. The consumer price index climbed 3.4 percent, the fastest pace since the oil shock in 1982, as 10 percent higher rates for electricity and a hike in the sales tax pushed costs sharply higher.

Prime Minister Shinzo Abe has championed an economic strategy aimed at breaking Japan free of years of deflation. The theory is that companies and households will spend more now if they expect things to cost more in the future due to inflation.

Last week, Abe released the latest iteration of reforms he is proposing to help sustain growth and boost competitiveness, vowing to trim the country's massive public debt and spur companies to spend more and diversify their employment practices.

But for most families struggling to get by on incomes that have been falling since 1997, wages must rise to increase or keep purchasing power constant. Despite some of the biggest wage increases in years for employees at some of the biggest companies, such as Toyota Motor Corp., income of salaried households dropped a real 4.6 percent from the year before in May, to an average 421,117 yen (about $4,160), the eighth straight monthly decline.

Similar to the "jobless recovery" in the U.S., Japan's rebound so far has mostly boosted the hiring of temporary or contract workers, as rising prices and tax hikes eat into consumer purchasing power. Wage increases have been limited mostly to bonuses or to specific categories of workers, most of whom are contract or freelance employees in areas such as trucking and construction.

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