The Prediction of Japan's Industrial Output

Japan's industrial production probably fell for a second month in February as manufacturers cut output in anticipation that exports will slow.

Production probably fell a seasonally adjusted 0.7 percent from January, the first back-to-back decline in a year, according to the median forecast of 47 economists surveyed by Bloomberg News. The trade ministry will release the report on March 30 at 8:50 a.m. in Tokyo.

Slower growth in the U.S., destination of more than a fifth of Japan's exports, and tepid demand at home for automobiles prompted Nissan Motor Corp. to scale back production. The Lunar New Year holidays, observed widely in Asia, also caused export growth to slow last month and hurt shipments from South Korea and Taiwan.

``With two months of declines it's clear that production will be weak this quarter,'' said Yasukazu Shimizu, a senior market economist at Mizuho Securities Co. in Tokyo. ``While that doesn't spell out recession it makes it clear that there's no sense of urgency to raise borrowing costs.''

The Bank of Japan raised its key overnight borrowing rate to 0.5 percent in February, the second rate increase in more than six years.

Exports grew 9.7 percent last month after a longer Lunar New Year holiday curbed demand for goods in markets including China, Japan's second-largest export market. Shipments increased by 18.9 percent in January, the fastest pace in eight months.

Production Cuts

Nissan Motor, Japan's third-largest automaker, said earlier this month it plans to cut production at two of its factories in Japan because of weaker domestic demand. Nissan's sales in the world's second-largest economy have slipped for 17 straight months, causing it to miss its sales target this year.

A slowdown in the U.S., Japan's biggest export market, could discourage companies from increasing output. Production slipped 1.7 percent from a record in January as manufacturers, with stockpiles at a five-year high in the fourth quarter, scaled back output.

The cutbacks in production won't be extreme enough to cut Japan's longest expansion in more than 60 years short.

``Production is coming down from very high levels,'' said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo. ``We will see output pick up again after companies complete these inventory adjustments.''

Inventory, Shipments

The inventory ratio for electronic parts and devices, which measure the balance between inventory and shipments, had it's biggest drop in six months in January, an indication that companies are eating into stockpiles.

Kazumasa Iwata, one of the central bank's two deputy governors, said information-technology inventories may need to be adjusted in response to a buildup, curtailing production.

The extent of the correction would be ``marginal,'' said Iwata, the only central bank board member to oppose last month's rate increase.

Japan's economy slipped into recession in 2004 when electronics makers cut output to reduce the volume of goods sitting in warehouses that accumulated in anticipation of higher export demand.

U.S. Federal Reserve policy makers said recent economic indicators have been ``mixed'' and acknowledged the housing market slump when they kept the key interest rate at 5.25 percent last week.

The Bank of Japan's quarterly Tankan survey of business confidence will give a better gauge of the outlook of the economy as companies unveil their spending plans for the year starting April 1, economists including Mizuho's Shimizu said.

Tankan Survey

Sentiment among the nation's largest manufacturers probably slipped from a two-year high, economists said. Large companies, or those with more than 1 billion yen in capital, will probably say they will increase spending 1.8 percent next fiscal year, according to the median forecast of 24 economists surveyed by Bloomberg News, after stepping up investment at the fastest pace in more than a decade this year.

source:www.blommberg.com