Japan inflation slows in October, output and spending show signs of recovery

By Tetsushi Kajimoto and Stanley White

TOKYO (Reuters) - Japan's annual core consumer inflation slowed for a third straight month in October due to falling oil prices, highlighting the economic gloom facing Premier Shinzo Abe as he campaigns for a new mandate to implement his stalled recovery plan.

Factory output unexpectedly rose in October, suggesting companies have reduced inventories of unsold goods built up after April's sales tax hike triggered a recession.

Abe could draw some comfort from the manufacturing and household spending data, but there are still doubts that his reflationary policies dubbed "Abenomics" have done enough to improve the economy ahead of a Dec. 14 election.

"Inflation could continue to slow because oil prices are falling," said Hidenobu Tokuda, senior economist at Mizuho Research Institute. "Other data show the economy is recovering, but this is not really because of Abe's policies."

The core consumer price index (CPI), which excludes volatile fresh food but includes oil products, rose 2.9 percent year-on-year in October. That matched economists' median estimate and was slower than a 3.0 percent annual gain in the prior month.

Excluding the effects of April's tax hike, inflation was estimated at 0.9 percent, less than halfway to meeting the BOJ's 2 percent goal, a level investors see as impossible to reach next year.

Analysts remain sceptical of the BOJ view that inflation will accelerate to 2 percent in the fiscal year from April 2015 on a stronger job market and the economy moving closer to its potential output.

Japan's jobless rate fell to 3.5 percent from 3.6 percent in September, while the jobs-to-applicants ratio rose to 1.10, matching levels not seen in 22 years.

Household spending fell 4.0 percent in the year to October, down for seven months in a row, slower than a 5.6 percent annual decline in the previous month.

Some analysts say the yen's weakening, triggered by the BOJ's shock expansion of its quantitative easing on Oct. 31, will push up prices but with a lag of several months.

Trade ministry data showed industrial output rose 0.2 percent month-on-month in October. Manufacturers surveyed by the trade ministry expect output to rise 2.3 percent in November and 0.4 percent in December.

Separate data showed retail sales grew 1.4 percent in the year to October, topping the 1.2 percent economists expected.

(Editing by Eric Meijer)