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Last Updated: Tuesday, 30 January 2007, 08:29 GMT
Japanese consumer spending slips
People on mobile phones walk past clothing store in Tokyo
Japanese consumers appear to be keeping a tight rein on spending
A drop in Japan's household spending and rise in unemployment has raised question marks over whether interest rates will be raised soon.

Household spending fell 1.9% in December, the 12th drop in a row, prompting fears slow wage growth means shoppers are unwilling to spend.

Meanwhile, the jobless rate rose to 4.1% from 4.0% in November.

However, the government was upbeat on the economy, saying the "prolonged economic recovery was continuing".

Economics Minister Hiroko Ota said the drop in consumer spending was partly a result of the mild winter weather.

'Solid footing'

One bright spot for the economy was news that industrial production rose 0.7% in December from a month earlier - significantly ahead of forecasts of a 0.2% rise.

"That production rose for three months in a row shows that the economy is on a solid footing," said Taro Saito, a senior economist at NLI Research Institute in Tokyo.

Japan's economy has shown signs of slowing of late - with third-quarter growth coming in at 0.8%, some way below expectations.

Meanwhile, domestic consumption has remained fragile, prompting government worries about choking the economic recovery should they decide to raise rates.

Further inflation data last week also raised doubts over a near-term rise in interest rates.

The Consumer Price Index rose a slower-than-expected 0.1% in December compared with a year ago, as higher food and power bills were offset by lower oil costs.

Rate pressure

All economic data is being scrutinised for clues as to whether the Bank of Japan will raise interest rates - which currently stand at 0.25% - at its meeting next month.

While Japan's government prefers low rates to keep the economic recovery on track, other countries are demanding a rise to counter weakness in the yen.

According to reports, European governments plan to warn that low Japanese rates are distorting the value of the already weak yen at a G7 meeting next week.

Critics claim that by leaving the yen low against other currencies, Japan has an unfair advantage in trade with other nations.

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