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    Falling unemployment in Japan fails to spur spending and consumer prices

    Data out today showed Japan’s labor market continued to strengthen as unemployment fell to a 20-year low in October. The unemployment rate dropped to 3.1% in October against expectations it would stay unchanged at 3.4%.

    However, in what could be a worrying trend, household spending declined month-on-month for the second month in-a-row. Household consumption was down by 2.4% y/y in October, sharply below estimates that it would rise by 0.1%. It follows a 0.4% drop the prior month.

    The Bank of Japan had been hoping that falling unemployment would boost pay and encourage households to spend more. But wages have not risen as much as expected and consumers have held back their spending. As a result, inflationary pressures have remained subdued and the ongoing slump in commodity prices has put further downside pressure on prices.

    In October, the headline rate of CPI showed signs of picking up as it rose to 0.3% y/y from 0.0% the prior month and was above estimates of 0.2%. Core CPI, which excludes fresh foods and is a more closely watched indicator of inflationary pressures in Japan, was unchanged at -0.1% for the third consecutive month. But the “core-core” rate, which excludes both food and energy, fell for the first time since March, easing to 0.7% y/y in October from 0.9% in September.

    The Bank of Japan has been struggling to raise inflation to its 2% target despite increasing the size of its asset purchase to a massive 80 trillion yen a year in October 2014. In its latest inflation report, the Bank pushed back the time it expects inflation to rise towards the target by 6 months. The weakness in domestic demand and slowdown in emerging market economies have yet to convince BoJ policymakers that further stimulus is needed, even with the economy falling into technical recession in Q3. The Governor Haruhiko Kuroda has consistently reassured markets that the central bank stands ready to adjust policy if needed and some analysts still expect the BoJ to boost monetary stimulus in early 2016.

    The yen initially fell against the dollar on the mixed data but soon turned bullish as investors remain divided on further stimulus from the Bank of Japan. The dollar climbed at 122.63 yen after the data but soon fell back, hitting a low of 122.30 yen before recovering to 122.59 yen in mid-European session. The euro and the pound also both fell, touching intra-day lows before rebounding slightly to 129.83 and 184.32 respectively.

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