By Leika Kihara
TOKYO (Reuters) - Japan is approaching an end to deflation, the government said on Thursday, offering its most upbeat view on prices in nearly four years as a steady pick-up in the economy allows more companies to pass on rising costs to consumers.
The government also revised up its assessment on the job market to say it is "improving," as falls in the yen triggered by Prime Minister Shinzo Abe's reflationary policies boost manufacturers' profits and push down the jobless rate to levels before the collapse of Lehman Brothers.
"Recent price developments indicate that deflation is ending," the government said in a monthly economic report for August, offering a brighter view than last month when it said deflationary pressures were easing.
But it is too early to declare that Japan has made a sustained exit from deflation, according to an official who briefed journalists on the report, noting that doing so would require more lasting rises in consumer prices.
Japanese consumer prices rose in June for the first time in more than a year, although most of the increase was due to higher electricity bills rather than stronger demand that could drive a durable recovery.
The government has described the economy as in deflation since November 2009. Removing the word "deflation" from the report, or declaring that deflation is over, would herald a major success in its battle with price declines.
The government kept intact its assessment on the overall economy, saying it is "picking up steadily and showing some moves toward a sustained recovery."
The upgrade in its assessment on the job market came in response to data showing Japan's unemployment rate fell to 3.9 percent in June, its lowest since October 2008. Last month, the report said the job market was improving, albeit with some signs of weaknesses.
Japan's economy grew an annualised 2.6 percent in April-June to mark the third straight quarter of expansion as a pick-up in exports added to sustained strength in personal consumption.
That bodes well for Abe, who has made an end to economic stagnation among his top policy priorities, and the Bank of Japan, which offered an intense burst of monetary stimulus in April to achieve its 2 percent inflation target in two years.
Still, concerns remain.
Data earlier this week showed Japan's core machinery orders fell in June and companies expect them to fall further in the current quarter, another sign that government stimulus has yet to boost capital spending as debate intensifies over how to address massive and growing public debt.
Second-quarter growth also was slower than expected, offering ammunition to those seeking to temper a planned sales-tax increase over fears it could stifle the economic recovery.
