Japan's Industrial Production Falls 1.5% From Record

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

Output fell a seasonally adjusted 1.5 percent from December, when it rose to a record, the Ministry of Economy, Trade and Industry said in Tokyo today. The median estimate of 41 economists surveyed by Bloomberg News was for a 1.7 percent drop.

The Nikkei 225 Stock Average and yen fell as a slump in U.S. durable-goods orders prompted concern that growth in Japan's biggest export market may slow, leaving manufacturers such as Toyota Motor Corp. with cars it can't sell. The decline in production may make it more difficult for the Bank of Japan to keep raising borrowing costs after last week's increase.

``The industrial production data was somewhat of a concern and it suggests the Bank of Japan's move last week was definitely a high-risk move,'' said Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong. ``It suggests that producers were perhaps somewhat over optimistic on the outlook for global demand in 2007 at the turn of the year.''

Japan's Nikkei 225 Stock Average tumbled 3.2 percent to 17,548.31. The broader Topix index fell 3.8 percent. The yen dropped to 118.45 per dollar at 11:55 a.m. in Tokyo compared with 118.07 before the report was published.

The plunge in Japanese stocks isn't the result of concerns over the economy, Shoichi Nakagawa, the policy chief of Japan's ruling Liberal Democratic Party, said in an interview in Tokyo. He said the decline mostly reflects a slump in Chinese and U.S. markets.

U.S. Orders

U.S. durable-goods orders dropped 7.8 percent in January, reflecting the biggest slide in business equipment demand in three years, according to figures released yesterday by the Commerce Department.

Japan's retail sales fell 0.8 percent in January from a year earlier, the trade ministry said in a separate report today.

The Bank of Japan raised interest 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, remains 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.

Transportation equipment led the drop in production, declining the most ever, the trade ministry reported.

Inventories, Exports

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.

Manufacturers said production will decline 1.8 percent in February from a month earlier, the trade ministry said. They anticipate output to rise 2.4 percent in March from February.

Inventories fell 0.9 percent from December, the first drop in six months, today's report showed, signaling companies are reducing accumulated stockpiles. Shipments declined 0.3 percent and the ratio of inventories to shipments dropped 3.6 percent.

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

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 unchanged the previous month.

Toyota, Japan's largest automaker, is increasing output to meet higher demand. Toyota yesterday said production rose 3.2 percent in January, the 17th month of gains, though slower than the 8.8 percent increase in December.

source:www.bloomberg.com