UPDATE 1-Japan retail sales up, slowdown likely ahead

By Kaori Kaneko

TOKYO, July 29 (Reuters) - Japan's retail sales rose in June from a year earlier for the sixth straight month due to government stimulus steps, but analysts warned gains are likely slow later this year as the effects of such measures are expected to taper off.

Retail sales have been rising since the start of this year, supported by government subsidies for purchases of cars, electronics and other durable goods, but the incentive scheme for autos is set to expire in September and the purchase programme for electronics will end in December.

The Democratic Party-led government is trying to balance fiscal discipline with the need to spend to protect the economic recovery as it compiles the budget for the fiscal year starting next Arpil.

The government has put a cap on policy-related spending but it could come under pressure to roll back some of its policies to keep the spending cap, meaning there would be little leeway to stimulate the household sector if the outlook worsens.

'The positive effect from stimulus is becoming more subdued,' said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.

'There could be some front-loading of car purchases before those subsidies expire in September, so third-quarter consumption could be somewhat strong. However, in the fourth quarter consumption is likely to fall.'

Retail sales rose 3.2 percent in June from a year earlier after a 2.9 percent annual gain in May, according to data from the Ministry of Economy, Trade and Industry. In April retail sales surged 4.9 percent from the previous year, the fastest annual increase since March 1997.

The annual rise in June matched the median estimate.

Sales rose in June due to gains in auto sales, fuel and summer clothes, a government official told reporters at a briefing. But sales of cars and fuel are showing signs of slowing after rapid gains earlier this year.

Vehicle sales rose 12.4 percent in June from a year earlier, less than the 13.4 percent annual increase in May.

Sales of fuel and energy products rose 8.4 percent in June from a year ago, also slower than an 18.9 percent annual gain in the previous month.

Compared with the previous month, retail sales rose 0.4 percent on a seasonally adjusted basis, after falling 2.0 percent in May.

Japan's economy grew 1.2 percent in January-March from the previous quarter but analysts say the growth is likely to slow later this year as gains in consumer spending could moderate due to a lacklustre jobs market, while the impact of government stimulus spending is also expected to wear off.

Personal consumption, which makes up 60 percent of the economy, grew 0.4 percent in the same quarter.

Economists polled by Reuters expect Japan's economy to grow 0.4 percent in both the third and fourth quarters of this year, retaining a cautious view on an outlook clouded by the strong yen and Europe's debt woes.
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