Japan Recovery Loses Steam as Output Drops

Industrial production slid 1.9% in September, the fourth consecutive monthly decline.

Japan's export-led recovery showed further signs of losing steam on Oct. 29, with industrial production falling for the fourth month running in September as consumer prices slid anew.

Output from Japanese factories is feeling the effects from slowing export growth, as the boost from stimulus measures wanes and nations embrace tighter fiscal policies. Industrial production slid 1.9% in September from the previous month, data showed on Oct. 29, in the fourth consecutive monthly fall and heavier than the expected 0.6% drop.

Production of automobiles, electronics and other manufacturing were hardest hit, the Trade Ministry said, giving a bleak forecast for a 3.6% fall in October.

The expiration of recent car subsidies in Japan was a key factor, said analysts. "A slump in the auto industry is the outstanding factor for the decline in production," said Hideki Matsumura, senior economist at the Japan Research Institute.

The ministry forecast production to return to growth in November with a 1.7% rise. However, many analysts argue that such a scenario is overly optimistic.

"The (industrial output) recovery is now heavily relying on foreign demand, but that is also slowing down," said Matsumura, adding that he did not see a recovery emerging until the second half of next year.

The data underlined concerns for Japan after the government last week downgraded its view of the economy for the first time since February 2009. "The outlook for the fourth quarter is grim," consultancy firm Capital Economics said in a research note.

The Japanese currency has been trading at 15-year highs against the dollar, hammering the competitiveness of the crucial export sector, despite a yen-selling intervention by authorities last month. A strong yen not only makes Japan's growth-driving exports more expensive but also erodes companies' overseas profits when repatriated, with many companies considering sending more production overseas as a result.

It also makes imports cheaper, prolonging a demand-sapping cycle of deflation. Japanese consumers have been holding off on purchases in the hope of further price drops, thereby clouding future corporate investment.

Separate data illustrated Japan's entrenched deflation, showing that consumer prices fell 1.1% in September from a year earlier, marking the 19th straight month of decline. The fall was slightly greater than market expectations of a 1.0 percent decline, according to a joint Dow Jones Newswires and Nikkei poll of economists.

In its semi-annual economic report on Oct. 28, the Bank of Japan said consumer prices would continue falling until fiscal 2011 and pledged to hold its key rate between zero and 0.1% until deflation was beaten. The bank's decision to hold rates followed its surprise move this month to adopt a near zero-rate policy and announce a five trillion yen (US$61 billion) asset purchase scheme to lower borrowing costs and tackle deflation. It also lowered its forecast for the nation's growth and warned that a strong yen was slowing the fragile recovery from recession.

Japan's gross domestic product grew by an annualized 1.5% in the April-June quarter, well off the previous quarter's growth of 5%.

In other data Friday, Japan's unemployment rate fell 0.1 percentage points from August to 5% in September.

Copyright Agence France-Presse, 2010

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