Japan's Industrial Output Probably Fell From Record

Japan's industrial production probably fell the most in almost three years in January, signaling growth may slow in the world's second-largest economy.

Output fell a seasonally adjusted 1.7 percent from a record, according to the median estimate of 41 economists surveyed by Bloomberg News. The Ministry of Economy, Trade and Industry will release the figures at 8:50 a.m. in Tokyo tomorrow.

Higher export demand prompted companies including Toyota Motor Corp. to increase production to a record last year, fueling the economy's longest postwar expansion. Manufacturers may cut back output to draw down on accumulated inventories, causing growth to slow and making it more difficult for the Bank of Japan to keep tightening credit after raising interest rates last week.

``We're seeing signs that growth may moderate this year and production will be key in determining the course of the economy in the coming months,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. ``Should production falter, that will make it more difficult for the bank to justify another rate increase.''

The Bank of Japan raised rates for the second time in six years on Feb. 21, saying higher borrowing costs will help sustain economic growth. Japan's key rate, at 0.5 percent, is the lowest in the industrialized world.

Twenty-two of 26 economists surveyed by Bloomberg News last week said the bank will refrain from raising rates again until the third or fourth quarter of this year.

Inventory Buildup

Production, which rose to a record in each of the previous three months, will begin to moderate even as exports grow, economists said. Companies added inventories last year in anticipation of higher demand and will probably draw down on those before increasing output, they said.

Inventories rose 3.6 percent last quarter to their highest levels in five years, driven by record stockpiles of electronic parts and devices, government data show. Japan's economy almost slipped into recession in 2004 when electronics makers cut output to reduce the volume of goods sitting in their warehouses.

The buildup of electronics inventories was the result of consumers waiting for the release of new computer operating systems as well as delays in the supply of parts for new game consoles, said Takehiro Sato.

``These do not necessarily point to weaknesses in demand,'' said Sato, chief Japan economist at Morgan Stanley in Tokyo. ``Granted, the outlook for information technology-related goods now deserves monitoring, but at this point we will opt against excess pessimism.''

Export Volume

Demand for Japanese products is still strong even as inventories accumulate, trade figures show. Exports measured by volume, which tend to correlate closely with production, climbed 1.8 percent in January after being flat the previous month.

Toyota, Japan's largest automaker, increased output in December for the 16th straight month to meet higher demand for its fuel-efficient vehicles in the U.S. and other overseas markets, according to the most recent figures available.

The following shows economists' forecasts for industrial production. Month-on-month figures are seasonally adjusted.

source:www.bloomberg.com