-Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute
Retail sales in Japan unexpectedly dropped in December, sapping hopes that the world's third biggest economy has weathered the worst of the post-tax hike recession. Retails sales dropped 0.3% on month in December, while an annual 0.2% growth was against analysts' expectations for a 0.9% gain. Policymakers expect consumer spending to increase this year as the chocking effect of the sales tax hike fades away, and they count on wages to foster pickup in private consumption, which accounts for about 60% of the economy. Japan's core inflation also added to the recent streak of worse than expected data, as the gauge fell for a fifth month in a row in December, pulling the Bank of Japan further away from reaching its price goal. Consumer prices excluding fresh food rose 2.5% on year in December following the 2.7% increase a month earlier and against a 2.6% forecast, while stripping out the effect of sales-tax hike in April 2014, core inflation climbed 0.5%. At the recent BoJ's monetary policy meeting officials revised downwards their forecasts for inflation over the next two years amid the sharp decline in petrol prices. The central bank now expects inflation of around 0.9% in the 2014 fiscal year compared with the 1.2% forecast in October. The bank's inflation outlook for the 2015 fiscal year was lowered even more dramatically to just 1.0% from 1.7%. Meanwhile, Japan's industrial output also surprised markets to the downside, as it grew less than expected by 1% on month in December versus the 1.3% forecasts by economists.
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