Japan's economy picked up fresh momentum in August, with a series of data showing Friday that the key jobless rate fell while industrial output rebounded and deflation eased.
The figures added to growing speculation that the Bank of Japan may end its super-stimulative monetary policy early in 2006 as a decade of stagnation and disappointment appears finally to be coming to a close.
Japan's unemployment rate fell to 4.3 percent in August from 4.4 percent in July, the government said, raising hopes of positive knock-on effects on consumer spending, which underpins 55 percent of the economy.
Industrial output rebounded 1.2 percent in August from July and showed a rise of 1.6 percent from the same month of the previous year.
A trade ministry survey of manufacturers also projected that industrial output would increase 3.0 percent in September month-on-month.
Overall "the report is favourable in confirming the escape from the long soft patch and suggesting that the moderate recovery of production will likely continue," commented Morgan Stanley economist Takehiro Sato.
Underscoring a pick-up in consumer activity, spending by households headed by salaried employees rose by 3.2 percent in August from July, the fourth monthly increase in five.
Such an improvement was a "big plus" for the world's number two economy, said Takahide Kiuchi, an economist at Nomura Research Institute.
There was also good news on deflation with core consumer prices falling only 0.1 percent in August from a year earlier, compared with a drop of 0.2 percent in July.
Taken together the data paint a relatively rosy picture of the world's second largest economy, reinforcing upbeat recent surveys from the government, the Bank of Japan and the International Monetary Fund.
"I think overall the picture is quite positive," said Richard Jerram, chief economist at Macquarie Securities in Tokyo.
"There's a clear improvement in the labour markets. We're seeing an improvement in output, which seems to be driven by both the export side and the domestic demand side, and we're seeing a gradual diminution of deflation."
Jerram recently raised his forecasts for Japanese economic growth to 2.8 percent in 2005 and 2.5 percent in 2006, from 1.9 percent and 2.3 percent respectively.
Upbeat forecasts for the Japanese economy have generated a burst of interest in Tokyo shares among foreign investors, driving the Nikkei-225 up by almost 20 percent this year.
At the same time, some economists remain cautious, noting that there have been plenty of false starts in the Japanese economy over the past decade.
Despite a series of multi-trillion-yen fiscal stimulus packages and near-zero interest rates, the economy has stagnated and suffered from deflation for years while the public debt ballooned.
One major difference this time, however, is that past recoveries tended to be driven by public spending and demand for Japanese exports while now the revival appears to be powered largely by robust domestic demand.
The Bank of Japan also appears to be finally winning its long fight with deflation, which discourages consumers from spending because they can get a better bargain in the future, and also undermines company profits.
The central bank has vowed to maintain its super-stimulative monetary policy by flooding the financial market with cash until deflation gives way to mild inflation for a sustained period.
Bank of Japan Governor Toshihiko Fukui said Thursday that the chances are growing that the central bank will change its policy early next year although economists are divided on the likely timing of actual interest rate rises. Jerram at Macquarie Securities expects the Bank of Japan to raise interest rates once in the April-June quarter next year but then pause.
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