By Mayumi Otsuma and Toru Fujioka
June 27 (Bloomberg) -- Japan's household spending slumped in May, the ratio of jobs available fell to a three-year low and the inflation rate almost doubled, signaling that the economy's longest postwar expansion may be over.
Household spending declined 3.2 percent, the most since September 2006, the statistics bureau said today. Core consumer prices, which exclude fruit, fish and vegetables, rose 1.5 percent from a year earlier after climbing 0.9 percent in April.
The Nikkei 225 Stock Average slid to a two-month low on concern global demand for Japanese-made cars and TVs is being curbed by record crude prices. Bonds gained because the risk of a recession may prevent the Bank of Japan from raising its key interest rate from 0.5 percent even as inflation accelerates.
``We're clearly seeing that the household sector is being severely damaged by the weaker job market and rapid inflation,'' said Takahide Kiuchi, chief economist at Nomura Securities Co. ``Japan's economy is likely to contract in the second quarter.''
The government downgraded its assessment of industrial production even after a report today showed output rose 2.9 percent in May from April, the first increase in three months. Production is showing signs of weakness because of higher energy costs and weakening global demand, the Trade Ministry said.
Nikkei Slides
The Nikkei slid 2 percent, the seventh daily drop, capping off the worst losing streak in seven months. Government debt completed the longest rally since November 2006, pushing the yield on the 10-year bond 4 basis points lower to 1.615 percent. The yen has lost 6.8 percent against the dollar in the past three months and traded at 106.89 from 106.88 before the reports.
``With the economy slowing, the central bank cannot raise interest rates anytime soon,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp.
Group of Eight finance ministers said this month that record food and fuel costs pose a ``serious challenge'' to global growth. The U.S. Federal Reserve alluded to the risk of faster inflation when it kept interest rates on hold this week.
In Japan, higher prices for steel, rubber and aluminum have increased production costs at companies including Nissan Motor Co. Those costs are ``practically impossible to absorb,'' Chief Executive Officer Carlos Ghosn told shareholders this week.
``This isn't good inflation because it's driven by rising material prices,'' Economic and Fiscal Policy Minister Hiroko Ota said at a briefing in Tokyo today. ``I'm closely watching its impact on corporate profits and consumer sentiment.''
Slumping Profits
First-quarter profits fell at the fastest pace since the economy emerged from its last recession in 2002.
Oil prices have doubled in the past year, and surged to a record $140.39 a barrel yesterday. Higher energy and raw- materials costs will drag large manufacturers' confidence to the lowest level in almost five years, economists predict the Bank of Japan's Tankan business survey to show on July 1.
Honda Motor Co., Japan's second-largest carmaker, said yesterday its domestic output and exports both fell 12 percent last month because of slower sales in the U.S. and the U.K.
Japan's economic outlook is increasingly ``uncertain,'' central bank policy board member Seiji Nakamura said yesterday, citing the risk of slower global growth and the increase in energy and raw-materials costs. The bank is concerned higher prices may cause businesses and consumers to spend less, he said.
The world's second-largest economy shrank at an annual 0.4 percent pace this quarter, according to the median estimate of 17 economists surveyed by Bloomberg. The current expansion began in February 2002, making it the longest in more than 60 years.
Stagflation Risk
``Today's economic data pointed to growing risks of stagflation,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``Japan's economy may fall into a recession.''
Higher food and fuel costs are forcing companies to raise prices that aren't being accepted by consumers.
Yamazaki Baking Co. and Nisshin Seifun Group Inc. raised prices of bread, cakes and pasta this year because of higher wheat costs. Consumers spent 5.9 percent less on bread and 6.1 percent less on pasta in May, the statistics bureau said.
Retail sales rose 0.2 percent in May from a year earlier, a separate report showed today, prompting the government to cut its assessment for the first time since January 2007, describing sales as ``flat.''
Prices of daily necessities are climbing faster than wages, causing consumer sentiment to plunge to a six-year low in May. The ratio of jobs for each applicant slid to 0.92, the Labor Ministry said today. The unemployment rate stayed at 4 percent.
``Labor market data suggests consumption may weaken further,'' said Takuji Okubo, a senior economist at Merrill Lynch & Co. in Tokyo. ``Consumption is being squeezed between rising prices and a deteriorating employment situation.''
To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
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