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Business Home > Indicators
Japan May output falls, firms see rebound

(Reuters) / 29 June 2012

Japanese factory output fell for the second straight month in May and manufacturing activity shrank in June, in a sign that any recovery in the world’s third largest economy will be modest as the growth spurt of earlier this year starts to wane.

But companies forecast production to bounce back in June and July, suggesting that the dip is largely due to inventory adjustment and won’t derail the pickup in growth now under way.

Industrial output fell 3.1 percent in May, more than a median market forecast of a 2.8 percent drop, after a 0.2 percent drop in April, data from the trade ministry showed on Friday.

About 70 percent of the fall was due to cuts in automobile output, as support from demand generated by government subsidies for low-emission cars began to fade with money for the programme seen running out by the final quarter of this year.

“Carmakers had some extra inventory, so they cut their factory output in May, which led to the decline in overall industrial production,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting in Tokyo.

“This is an adjustment in production, but it won’t last long, as indicated by companies’ forecasts for June and July.”

Japan’s economy is expected to outperform most of its G7 peers this year with growth of around 2 percent, helped by earthquake reconstruction spending.

Manufacturers surveyed by the trade ministry expect output to rise 2.7 percent in June, more than the previous forecast of 2.4 percent, and expand further 2.4 percent in July, in a sign any adjustment in output will be temporary.

But the strong yen, Europe’s continuing debt crisis and slowing growth in emerging economies are clouding the outlook for the export-reliant economy.

Outlook murky

The purchasing managers’ survey for June showed the first contraction in manufacturing activity in seven months and export orders declined, suggseting that Europe’s debt crisis could worsen overseas demand.

Some economists, however, were confident that monetary easing will support growth in major economies.

“We expect the U.S. recovery to strengthen in the second half of this year and that emerging markets will also pick up due to monetary easing,” said Takuji Aida, senior economist at UBS Securities.

“Japan’s domestic demand is also improving due to reconstruction and the jobless rate is falling. The fall in industrial output will be temporary.”

Forecasts from the industries that typically drive Japan’s economic growth suggest that the dip in production could possibly end at the start of the third quarter.

Carmakers expect their output to fall 3.2 percent in June and then expand 1.4 percent in July. Makers of electronic parts, such as semiconductor equipment, expect their output to jump 14.1 percent in June and 6.3 percent in July, according to the output data.

But support from spending for rebuilding from last year’s earthquake, which has offset some of the pain from slowing overseas demand, may prove bumpy due to delays in some reconstruction projects.

Some analysts, including Miyagawa at Mizuho Securities Research & Consulting, thus expect the economy to have continued expanding in April-June but start to slow in the second half of this year.

Separate data showed that core consumer prices fell 0.1 percent in May from a year earlier, marking the first drop in four months in a sign the central bank’s 1 percent inflation goal is remains elusive.

The price data may add to pressure on the Bank of Japan to do more to beat deflation at its next policy-setting meeting on July 11-12, when it will issue new quarterly economic and price forecasts.

The central bank revised up its assessment of Japan’s economy this month to say it has started to pick up moderately on solid exports and output. But it has also warned of risks to the outlook, such as the fallout from Europe’s debt crisis, and made clear it was ready to ease monetary policy again should Japan’s recovery come under threat.

“There is no good reason for the BOJ to ease monetary policy this month, but that also depends on how things go in the financial markets and the European situation between now and the next monetary policy meeting,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo.

Japan failed to spend 40 percent of the money it allocated for the first year of reconstruction in the country’s

However, housing starts rose 9.3 percent in May from a year earlier, up for the fourth straight month, data from the land ministry showed on Friday, reflecting a quickening pace of reconstruction. Orders received by 50 major construction companies in May fell 0.9 percent from a year earlier.



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