January 31, 2011 / 3:35 AM / 9 years ago

WRAPUP 1-Japan, S.Korea factory output up, recovery under way

* Recovery in global trade demand to support Japan, S.Korea

* Data reinforces view Japan to pull out of lull soon

* Factory output supports case for rate hikes in S.Korea

* Excessive tightening in China is risk to export demand

By Rie Ishiguro and Stanley White

TOKYO, Jan 31 (Reuters) - Industrial output in Japan and South Korea jumped more than expected in December in a sign that a draw down of inventories and a rebound in export demand will help to underpin recovery in the global economy this year.

The data from Japan is encouraging as it supports the central bank’s view that the economy will likely resume growing this quarter after a contraction widely expected in the fourth quarter following the expiry of government incentives for car purchases.

Rising factory output also bolstered expectations that the Bank of Korea (BOK) will raise interest rates further this year to curb inflationary pressures.

Growing reliance on trade with neighbouring China is a risk to the outlook, because demand for Japanese and South Korean goods could suffer if China tightens monetary policy excessively to slow rising prices and stem bubbles in its property market.

“The output numbers are very strong,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

“In South Korea and Taiwan the inventory adjustment cycle for semiconductors has proceeded, and this is helping Japan’s industrial output. The data support the Bank of Japan’s scenario, but the risk is China as they are worried about inflation.”

JAPAN MANUFACTURING EXPANDS

Japan’s industrial output rose 3.1 percent in December, more than a median market forecast for a 2.9 percent increase, on strong overseas demand for cars and electronic parts, the Ministry of Economy, Trade and Industry said on Monday.

Manufacturers surveyed by the ministry expect output to rise 5.7 percent in January and decline 1.2 percent in February.

The government raised its assessment of industrial production for the first time since April 2009, saying output was showing signs of picking up.

Adding to growing optimism over Japan’s economic outlook, PMI data showed the country’s manufacturing activity expanded for the first time in five months in January.

The PMI index for new export orders also rose, showing orders grew for the first time in four months.

SOUTH KOREA ON A ROLL

South Korea’s seasonally adjusted reading in the industrial output index rose 2.8 percent in December, compared with the median forecast for a 2.0 percent gain in a Reuters poll and following a revised 1.5 percent rise in November.

Compared with the same period a year ago, industrial output grew 9.8 percent in December, Statistics Korea data showed. That was slightly less than market expectations for a 10.1 percent annual rise and revised 10.7 percent annual growth in November.

Financial markets in Tokyo and Seoul shrugged off the better-than-expected data as global investors shifted money to safer assets after six days of mass anti-government protests in Egypt.

“I think situations in the United States are turning positive for South Korea but uncertainties remain on when the Chinese economy will take a negative direction,” said Jun Min-Kyoo, economist at Korea Investment and Securities in Seoul.

“As we see the central bank repeatedly emphasised the importance of curbing inflation, I think another rate hike is coming in the first quarter.”

South Korea’s economy grew a seasonally adjusted 0.5 percent in the October-December period from the previous quarter, expanding for an eighth consecutive quarter despite declines in government spending and corporate facilities investment.

Both the government and central bank expect Asia’s fourth-largest economy to keep growing despite recent signs of slowdown, and have said economic policy would be focused on taming inflation for the time being.

The BOK surprised markets early this month by raising the benchmark interest rate to 2.75 percent as inflation expectations built up. Analysts forecast the BOK could raise the rate again in March or April unless the economy loses steam quickly.

In contrast, the Bank of Japan (BOJ) is battling persistent deflation and is likely to stick with its ultra-easy monetary policy and purchases of a broad range of assets.

The BOJ is uneasy about the growing attention Japan’s debt pile is getting from the markets after Standard and Poor’s downgraded Japan last week, but the BOJ feels it can stand pat unless bond yields shoot up further.

Japan’s economy likely rebounded in the first quarter after an expected slight contraction in the final quarter of last year, as companies restock inventories and exports recover from a soft patch late last year.

Annual export growth picked up more strongly than expected in December as orders from China and the United States gathered upward momentum. (Additional reporting by Lee Shin-hyung and Kim Yeonhee in Seoul; Editing by Kim Coghill)

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