Japan Production Falls 2%, Twice as Much as Predicted (Update4)

Feb. 28 -- Japan's factory production fell in January at twice the pace economists predicted as a deepening U.S. slump weakened demand for cars and electronics.

Companies cut output 2 percent from December, when it rose 1.4 percent, the Trade Ministry said today in Tokyo. The median estimate of 47 economists surveyed by Bloomberg News was for a 0.8 percent decline.

The report suggests manufacturers are concerned a U.S. slowdown may be taking its toll on the emerging markets where Japan ships more than half its exports. Cutbacks in production, which have coincided with the nation's last three recessions, increase the possibility the economy will lose steam this year.

``This makes it clear that companies have become more cautious,'' said Junko Nishioka, an economist at ABN Amro Securities in Tokyo. ``Exports and production are slowing and wages remain subdued, so there are no drivers to boost the economy.''

The yen traded at 106.34 per dollar at 12:58 p.m. in Tokyo from 106.39 before the reports were published. The yield on Japan's 10-year bond fell half a basis point to 1.42 percent.

Cutbacks in output of electronic parts and devices and transportation equipment drove about two-thirds of the decline, the government said.

Companies plan to cut production in February as well, the report showed. Manufacturers see output sliding 2.9 percent from January, worse than the 2.2 percent drop they earlier anticipated. Output will rebound 2.8 percent next month, the companies said.

Soft Patch

``It's highly likely production will fall in the first quarter, which would signal Japan is a soft patch at the very least,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

The risk of a slowdown makes it unlikely the Bank of Japan will raise interest rates this year. The central bank will have to hold its key rate at 0.5 percent until 2009, according to 22 of 34 economists surveyed by Bloomberg News.

The economy is in a soft patch that may be ``somewhat prolonged,'' central bank policy board member Atsushi Mizuno said in a speech today. It's ``natural'' to expect the U.S. slowdown will hurt economic growth in other countries, he said.

Central bank Governor Toshihiko Fukui said last week the likelihood of a sharper U.S. slowdown is increasing. A deeper slump in the world's biggest economy would have ``adverse effects'' on the emerging markets that Japanese exporters depend on, he said.

Belt-Tightening

Shipments to the U.S., Japan's biggest overseas market, fell for a fifth month in January. Canon Inc., Japan's biggest camera maker, last month forecast that belt-tightening among U.S. consumers will cause sales in the Americas to fall for the first time in nine years.

The government downplayed the month-on-month drop in production, saying it was exaggerated by flaws in the seasonal adjustment calculations, which assumed manufacturers ramped up output at the start of the year. Companies now tend to adjust production on a just-in-time basis, said Masato Hisatake, director of economic analysis at the Trade Ministry.

``We're on the alert for any sign that companies are cutting back because of the U.S. slowdown,'' Hisatake said. ``But that's just not what manufacturers are telling us.''

Demand from Asia and Europe has so far helped manufacturers weather the drop in U.S. sales. Exports, along with capital spending, helped the economy grow at an annualized 3.7 percent last quarter.

Emerging Markets

The International Monetary Fund forecasts that, despite the U.S. slowdown, the world economy will grow about 4.1 percent this year, faster than the 3.7 percent average of the past quarter century. Emerging markets including China, India and Brazil will expand 6.9 percent.

A separate report today showed that retail sales rose for a sixth month as consumers paid near-record prices for gasoline and new models encouraged them to buy more cars. Retail sales climbed 1.5 percent in January from a year ago, the Trade Ministry said.