Japan's unemployment rate rose unexpectedly in May, factory output declined and household consumption fell, illustrating the fragile nature of a recovery beset by weak domestic demand.
The data poses a challenge for Prime Minister Naoto Kan's government ahead of July elections as he places efforts to cut the industrialised world's biggest public debt at the core of his agenda and discusses tax hikes.
Exports have driven Japan's recovery from recession but recent data showed the pace of shipments was losing steam amid anxieties over both the impact of global stimulus withdrawal and European debt on exports.
And Japan's domestic picture remains weak, with unemployment surprising economists by edging higher in May to 5.2 percent, from 5.1 percent in April, missing expectations of a fall to 5.0 percent.
Such data "will add to concerns that the recovery in domestic demand is too fragile to offset any slowdown in exports as a result of weakening global demand and the strong yen," Capital Economics said in a research note.
In an illustration of the domestic challenge facing a greying population, the number of active employees in May was the lowest for 20 years, an official at the internal affairs ministry said.
The number stood at a seasonally-adjusted 62.21 million, the lowest since 62.05 million in February 1990.
May also saw average household consumption fall unexpectedly by 0.7 percent on-year, the government said, defying expectations of a 0.5 percent rise as weak domestic demand continues to burden the Japanese economy.
Crippling deflation and weak domestic demand continue to weigh on growth as consumers defer purchases in the hope of further price falls. The government has said it aims to end deflation by fiscal 2011.
The latest data illustrate that Japan's export-led recovery has yet to reach the broader economy, say analysts.
"It's hard to say Japan is on track to an autonomous recovery," said Yoshiki Shinke, economist at Dai-ichi Life Research Institute.
"Even though capital investment is recovering, domestic consumption is still subdued. The recovery is likely to continue to rely on exports for the time being."
Japan came under fire from the United States at the weekend's Group of 20 nations summit in Toronto for not doing enough to bolster domestic demand-led growth.
The risk of export dependency has also been underlined by a recent slowdown amid concerns that the withdrawal of global stimulus and European debt could affect overseas shipments.
Exporters have eyed Europe cautiously, with the safe-haven yen soaring in recent months on European debt worries, which if sustained will dent exporters' repatriated profits and make their goods more expensive overseas.
Factory output in May was down 0.1 percent from April, the monthly first drop in three months and following a 1.3 percent gain in April. The decrease was due to lower transport equipment and paper production, the government said.
Shipments slipped 1.7 percent on-month while inventories rose 2.0 percent.
"The decline in shipments was worse than that in production, reflecting slowing exports," said Hiroshi Watanabe, an economist at the Daiwa Institute of Research.
"Consequently, the inventory rate shot up, especially in main industries such as the IT, digital devices and transportation sectors."
Watanabe added that the pace of recovery will slow further as exports face growing pressure from global austerity drives and China's efforts to cool a red-hot economy to curb inflation.
Copyright 2010 AFP Global Edition
