Bloomberg News

Japan Production Decline Undercuts Signs of Recovery: Economy

March 29, 2012

Retail sales and industrial production exceeded economists’ estimates in January. Photographer: Tomohiro Ohsumi/Bloomberg

Retail sales and industrial production exceeded economists’ estimates in January. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s industrial production unexpectedly dropped in February, undercutting signs of an economic rebound in the first quarter as policy makers assess whether to apply further stimulus.

Factory output slid 1.2 percent from the previous month, the Trade Ministry said in Tokyo today, after a 1.9 percent gain in January. The median estimate in a Bloomberg News survey was for a 1.3 percent increase. The unemployment rate fell to 4.5 percent and consumer prices excluding fresh food unexpectedly rose 0.1 percent, government reports showed.

The Bank of Japan (8301) has come under pressure by a group of lawmakers to bolster stimulus efforts, with a board member this week questioned on the idea of adopting a Federal Reserve-style “operation twist,” swapping short-term bonds for longer-dated securities. While the first gain in five months in consumer prices prompted the yen to strengthen, inflation remains distant from the 1 percent goal that the BOJ announced last month.

“They’ll have to maintain their easing stance for a while to prop up the economy,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo, referring to BOJ policy makers. “A slight increase in prices won’t make the BOJ optimistic.”

The yen traded 0.2 percent higher at 82.24 per dollar as of 10:22 a.m. in Tokyo, after earlier jumping as much as 0.8 percent on the data. The Nikkei 225 Stock Average fell 0.1 percent.

Betting on Reconstruction

Policy makers are counting on reconstruction spending after last year’s earthquake and tsunami to help propel the rebound from a contraction in 2011. Gross domestic product may expand an annualized 1.7 percent this quarter after a 0.7 percent contraction in the final three months of last year, according to the median estimate in a Bloomberg News survey of analysts.

Elsewhere in Asia, South Korea reported a slower gain in industrial output. Revised figures for the nation’s fourth- quarter gross domestic product showed 0.3 percent growth from the previous three months, less than a previous estimate of 0.4 percent.

“We’re apparently going through a trough but the speed and magnitude of an economic recovery highly hinges on global demand,” Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co. in Seoul, said before the data.

The euro region is due to report an inflation estimate, with a 2.5 percent annual rate likely for March according to the median forecast in a Bloomberg News survey of economists. Germany reports retail sales today and France also gives details on consumer spending.

In the U.S., the final reading for the Thomson Reuters/University of Michigan measure of consumer sentiment for this month is due and Canada will report GDP for January.

Weakness in Demand

In Japan, some lawmakers have been calling on the central bank to ease policy further after it expanded its asset-purchase facility in February and set the 1 percent inflation target. Answering politicians questions in the Diet, BOJ Deputy Governor Kiyohiko Nishimura said in parliament on March 28 implementing a Japanese version of the Federal Reserve’s maturity extension program for its bond holdings won’t be necessary.

Weakness in demand in Asia and Europe makes it difficult for exports and output to gain momentum, according to Yoshimasa Maruyama, an economist at Itochu Corp. (8001) in Tokyo.

Exports to China, Japan’s largest overseas market, fell 14 percent in February from a year earlier, the fifth consecutive decline, according to government data. Komatsu Ltd. (6301)’s excavator sales in China fell 40 percent so far in February from a year earlier, President Kunio Noji said on Feb. 23.

Temporary Setback

At the same time, there are signs that the slump in output reported today may be only be temporary. Manufacturers said they plan to increase production 2.6 percent this month and 0.7 percent in April, today’s report showed.

Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo, said that the decline was the aftermath of a temporary lift when output bounced back after disruptions to manufacturers from flooding in Thailand ended.The goverment also said data has been affected by the Leap Year.

A decline in the yen against the dollar from a post World War II high in October last year and earthquake reconstruction work are aiding an economy that contracted in the fourth quarter.

“Japan’s recovery will continue to pick up in the first half of this year,” said Shuichi Obata, senior economist at Nomura Securities Co. “Growth in production for March and April will absorb a decline in February.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at

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