August 31, 2011 / 12:55 AM / in 6 years

UPDATE 2-Japan industrial output growth slows as yen weighs

* July output up 0.6 pct vs 1.5 pct forecast

* Manufacturers see 2.8 pct rise in Aug, 2.4 pct drop in Sept

* Strong yen, global slowdown, slow reconstruction cloud outlook

* Data raises doubts about strength of rebound in output (Adds graphic, detail)

By Kaori Kaneko

TOKYO, Aug 31 (Reuters) - Japanese factory output rose less than forecast in July and companies expect production to dip next month in a sign the surging yen and slowing global growth are weighing on the recovery in the export-reliant economy.

Industrial output rose 0.6 percent in July from the previous month, against a median market forecast for a 1.5 percent increase and following a 3.8 percent rise in June, data from the Ministry of Economy, Trade and Industry showed on Wednesday.

Manufacturers surveyed by the ministry ramped up their output growth forecast for August to 2.8 percent from 2.0 percent, but predict a 2.4 percent decline in September.

“The expected drop in September is bigger than anticipated,” said Mari Iwashita, chief market economist at SMBC Nikko Securities. “It is a worrying sign going into the fourth quarter.”

Output has been rebounding from the deep slump caused by the March 11 earthquake and tsunami as companies made strides in mending broken supply chains and factories. The July figures showed output of cars and telecoms equipment rose while electronics and chemicals fell.

But sluggish growth in the major demand centres of Europe and the United States and a yen close to record highs raise doubts about the strength of the rebound in the months ahead.

Indeed, a purchasing managers’ survey showed new export orders fell in August to their lowest level in four months as growth for the overall sector cooled.

“It looks like industrial production is losing momentum due to a slowdown in the global economy,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo.

“This is payback from the quick V-shaped rebound after the natural disaster. We could see a pickup in output again toward the end of the year as overseas demand stabilises, but the trend won’t be that strong,” he said.

Yoshihiko Noda, voted in this week as Japan’s sixth prime minister in just five years, has said he is aware of the economic problems as he also takes on the task of uniting his fractious ruling party and resolving the worst nuclear power crisis since Chernobyl.

Still, the conservative forecasts of Japan’s companies point to a rise in output in the July-to-September quarter of 6.3 percent, which would be the strongest increase since the first quarter of 2010, said an official in a briefing on the data.

Analysts polled by Reuters early this month predicted Japan’s economy would pull out from the post-disaster recession and grow 1.2 percent in the current quarter, the fastest pace among major industrialised economies.

In a sign the recovery continued, retail sales and household spending data on Tuesday showed a further improvement in personal consumption.

The government’s decision to lift mandatory power restrictions for large users in greater Tokyo two weeks earlier than planned is also expected to bode well for industry.

But the yen’s strength and a slowdown in the global recovery from the financial crisis are nagging worries for manufacturers, which was reflected in the September output expectations.

“This will force revisions in the Oct-Dec production forecasts since it was almost a given that the July-September figure would be quite good,” said Iwashita.

Reconstruction of Japan’s disaster hit areas will help lift economic activity. Tokyo plans to spend 13 trillion yen ($170 billion) to rebuild on top of 6 trillion yen already earmarked for immediate relief measures, but it is unclear when the third supplementary budget will be implemented to kick-start full-fledged reconstruction, as the political impasse has delayed rebuilding efforts.

Bank of Japan Governor Masaaki Shirakawa has signalled the bank’s readiness to ease monetary policy again if the economy’s recovery prospects are threatened. The BOJ will hold its regular rate review on Sept. 6-7. (Writing by Rie Ishiguro and Shinichi Saoshiro; Editing by Tomasz Janowski)

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