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UPDATE 1-Japan says econ recovering, rate hike seen nearing

(Adds BOJ governor and minister’s comments, data, byline)

TOKYO, July 17 (Reuters) - The Japanese government stuck to its view that the economy was recovering despite weak industrial output, while noting softer consumer confidence, in a monthly economic report issued on Tuesday.

“The economy is recovering despite weakness in some sectors of industrial production,” the government said, using the same phrase for the fourth straight month.

Economics Minister Hiroko Ota said a slowdown in exports to the United States was part of the reason behind the weakness in output and vowed to monitor developments in the world’s biggest economy.

Bank of Japan Governor Toshihiko Fukui, nevertheless, said he was not worried about production, in a sign that the central bank sees that the economy remains on a recovery track, paving the way for future rate hikes.

“No worries about production,” he told reporters after attending a government meeting on the report.

More than two-thirds of economists surveyed by government-affiliated Economic Planning Association expect the BOJ to raise interest rates in August.

The survey released on Tuesday found that 23 of 32 economists who responded saw the central bank lifting the overnight call rate target from the current 0.5 percent next month.

The government maintained its outlook that domestic private-sector demand will support the economic recovery, while warning against the impact of oil price movements on economies both at home and overseas.

The report said the continued strength in the corporate sector will filter through to households, while it was cautious about weaker consumer sentiment.

The government said consumer sentiment was on a soft note, lowering its view from the previous month’s report, which said it was flat.

This follows a recent government survey that showed Japanese consumer confidence worsened to a three-year low in June from three months earlier on rising prices of household goods.

The seasonally adjusted sentiment index for general households stood at 44.3 in June, the lowest since 44.0 in June 2004, official data showed last week.

However, the government did not change its overall assessment on personal consumption, which accounts for more than half of economic activity, saying it was picking up.

An official at the Cabinet Office, which draws up the monthly report, cited an improved view on income conditions as offsetting the deterioration in consumer sentiment.

Government data released on Tuesday signalled that service sector activity, on which personal consumption makes a significant impact, was somewhat weak.

The tertiary sector index declined 0.1 percent in May from April, compared with a 0.1 rise forecast in a Reuters poll.

The view on income conditions was upgraded as the number of employed has been increasing, the official said.

The government lowered its view on the trade and services surplus to flat from the previous report, which said it was increasing, partly because of weak demand in the United States.

It also slightly upgraded its view on domestic wholesale prices, saying they were rising on increased raw material costs. It had previously said the rise was only a recent trend.

Bank of Japan data showed last week that the corporate goods price index, which tracks trends in wholesale prices of goods, rose 2.3 percent in June from a year earlier. The pace of year-on-year rise sped up from 2.2 percent in May and matched that of April.

Additional reporting by Yoko Nishikawa and Hideyuki Sano

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