Japan spending slumps as consumers unconvinced by BOJ's stimulus

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TOKYO (Feb 27): Japanese households cut spending more than expected and retail sales fell for the first time in seven months in January, data showed on Friday, a sign the central bank's radical stimulus has yet to convince consumers that inflation will take hold.

Factory output jumped in January as exports rebounded on solid U.S. and Asia demand, but manufactures see output rising only slightly in the current month and then slumping in March, adding to evidence of an uneven economic recovery.

The soft consumption is a headache for the Bank of Japan, which hopes its aggressive money printing will fuel expectations that prices will rise ahead and prompt households to spend more now.

Separate data also underscored the dilemma the BOJ faces with slumping oil prices slowing annual core consumer inflation to 0.2 percent in January, pushing it further away from its ambitious 2 percent target.

A slew of data released on Friday underlined the patchy nature of the recovery.

Factory output jumped 4.0 percent in January, more than a median market forecast for a 2.7 percent gain, and manufactures surveyed by the government expect production to increase 0.2 percent in February before declining 3.2 percent in March, data by the trade ministry showed.

Household spending fell an annual 5.1 percent in January, down for a tenth straight month and more than a median market forecast for a 4.1 percent decline, separate data showed.

Retail sales also dropped 2.0 percent, worse than a median market forecast for a 1.3 percent decline.

Weak consumer mood has kept a lid on spending as wages have yet to increase enough to make up for the sales tax hike last April, casting doubt on the strength of the economic recovery.

Stripping out the effects of last year's tax hike, core consumer price index (CPI) cooled to 0.2 percent in the year to January, from 0.5 percent in December. It compared with a median market forecast of 0.3 percent.

The mixed data will keep the BOJ under pressure to maintain its stimulus, although Governor Haruhiko Kuroda has stressed he saw no need to ease again soon.

The BOJ argues that falling oil prices will lift inflation in the long run as it allows households and companies to spend more on other goods, thereby boosting the economy.

But analysts are deeply suspicious of whether the BOJ can meet its pledge of hitting its inflation target in the year beginning in April, as they expect it to take at least six months for the benefits of oil price falls to boost growth.