Japan received a sobering reminder Friday of its fragile recovery: The jobless rate rose, deflation deepened, and factories made fewer cars and mobile phones.
The figures underscore ongoing weakness in the world's No. 2 economy even as Japanese corporations report stellar quarterly earnings. Thanks to strong overseas demand and deep cost cuts, major Japanese companies including Sony Corp. and Panasonic Corp. rebounded back to profits in the April-June quarter.
But with governments around the world phasing out stimulus spending, growth is expected to slow in Japan and in its major export markets. A strong yen also poses a risk for the country, as it reduces the value of profits brought back from overseas by exporters and makes their products less competitive on price.
"Momentum has faded more than producers and economists anticipated," said Goldman Sachs analyst Chiwoong Lee of the drop in factory production.
The damp economic news, along with worries about a stronger yen, cooled sentiment in the stock market. The Nikkei 225 stock average led Asian declines with a 1.5 percent fall to 9,550.18.
The jobless rate rose to 5.3 percent, up for the fourth consecutive month and hitting its highest level since November, the government said. The actual number of jobless fell 1.1 percent from the previous year to 3.44 million, according to the Ministry of Internal Affairs and Communications. Those with jobs declined 0.3 percent to 62.8 million.
Meanwhile, industrial production retreated 1.5 percent in June from the previous month as factories reduced output of large passenger cars and cell phones. It was the first fall in fourth months.
Companies surveyed by the government expect factory production to fall 0.2 percent in July, then climb 2 percent in August.
Deflation persisted as Japan's core consumer price index, which excludes fresh food, fell 1 percent from a year earlier for the 16th consecutive month of decline.
The government's new tuition fee break for high school students was a big contributor to the drop in the CPI, dragging education costs down 13 percent, the Ministry of Internal Affairs and Communications said.
The core CPI for Tokyo — considered a barometer of broader price trends — fell 1.3 percent in July, pointing toward another nationwide drop this month.
Lower prices may boost individual purchasing power, but deflation is generally bad for an economy. It plagued Japan during its "Lost Decade" in the 1990s, hampering growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.
Japan's central bank says it does not tolerate deflation, but it expects prices to continue falling for the next couple of years. The new numbers may increase political pressure for the Bank of Japan to intensify the fight against deflation.
In a separate report, the ministry said average monthly household spending rose a real 0.5 percent in June. Economists cited hot weather and government incentives for purchases of energy efficient appliances as driving the increase.
"However, the weak production data and rise in inventories indicate that the recovery in household consumption will likely be short-lived," said Junko Nishioka, chief economist at RBS Securities Japan.