UPDATE 2-Japan industrial output gains slow, stirring recovery doubts

Wed May 30, 2012 10:43pm EDT

* April output up 0.2 pct vs forecast for 0.5 pct rise
    * Manufacturers see May output down 3.2 pct, June up 2.4 pct
    * China slowdown, Europe crisis pose risks to outlook


    By Leika Kihara	
    TOKYO, May 31 (Reuters) - Japanese factory output rose in
April at a slower pace than expected, in a discouraging sign
that China's slowing economy and Europe's debt crisis will weigh
on Japan's fragile recovery.	
    The data may keep the Bank of Japan under pressure to
maintain its ultra-easy monetary policy to keep the economy on a
recovery path after it returned to growth in the first quarter
from a year-end lull.	
    Still, the central bank is expected to avoid taking further
easing measures for now unless market jitters over the euro
zone's woes trigger a spike in the safe-haven yen.	
    The 0.2 percent increase in production was much slower than
a 1.3 percent rise in March and less than the median estimate
for a 0.5 percent gain, trade ministry data showed on Thursday,
as some manufacturers curbed production due to an increase in
inventories.	
    Manufacturers said they expect output to decline in May and
rebound in June, but economists said the risks from Europe's
debt crisis and a rising yen are reason to be cautious about the
pace of Japan's recovery.	
    "Growth was weaker than expected, reflecting sluggish demand
for IT-related goods worldwide, particularly in China," said
Takeshi Minami, chief economist at Norinchukin Research
Institute in Tokyo.	
    "The forecast for May is worrisome as that would mean
production would fall to levels seen last summer, and the
expected rebound in June is also weak. All of this stems from a
poor export environment."	
    The dollar fell to a 3-1/2 month low of 78.86 yen on
Thursday as investors sought shelter from the euro-zone storm in
the safe-harbour yen, triggering a warning from Finance Minister
Jun Azumi that he was closely watching markets for any excessive
moves in the Japanese currency.	
    	
    ASIA DEMAND WANING	
    Manufacturers surveyed by the ministry expect output to fall
3.2 percent in May and then increase 2.4 percent in June, the
data showed.	
    Japan's economy is headed for a moderate recovery as
rebuilding from a record earthquake in March 2011 gets into full
swing, and government subsidies for low-emission vehicles
support demand for automobiles.	
    In a sign the recovery was broadening, wages rose for the
third straight month in April and overtime pay, a barometer of
strength in corporate activity, gained the most in more than a
year. 	
    But slowing growth in China, Europe's debt crisis and the
persistent strength of the yen are clouding the outlook for the
export-reliant economy.	
    China, the world's second-largest economy and Japan's
biggest trading partner, is on course this year to grow 8.2
percent, its slowest pace since 1999, according to a consensus
forecast of investment bank economists in a Reuters poll.	
    Slowing Asian demand for smartphones and game machines is
starting to weigh on Japanese chip and electronic parts output,
which fell 7.8 percent in April to mark the second straight
month of declines, the data showed.	
    "The yen is strengthening but that doesn't immediately
change the outlook for Japanese output. More crucial is final
demand in China, as Asia-bound exports have yet to show signs of
picking up," said Junko Nishioka, chief economist at RBS
Securities in Tokyo.	
    The BOJ is becoming increasingly convinced of Japan's
recovery prospects and hopes that firm domestic spending, due
partly to government subsidies for low-emission cars, will
offset the slowdown in overseas demand.	
    Indeed, output of cars and other transport machinery rose
6.5 percent in April. But inventories of these goods also grew
11.7 percent, and manufacturers in the sector project output to
slump 13.6 percent in May, a sign the stimulus-driven boom may
have peaked.	
    "For some models, automakers appear to have finished
stocking up. Carmakers want to minimise the damage (from a slump
in sales) after the subsidies expire," said a trade ministry
official who briefed reporters on the data.	
    The subsidies for low-emission cars will expire when money
set aside for them runs out, which analysts say could be anytime
during the summer or autumn of this year.
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