March 29, 2013 / 3:51 AM / 7 years ago

UPDATE 2-Japan output unexpectedly falls; weak yen benefits awaited

* Nationwide Feb core CPI -0.3 pct yr/yr vs forecast -0.4
    * Output falls 0.1 pct in Feb vs forecast +2.6 pct
    * Softer demand for smartphones hurt parts output
    * Analysts expect output fall to be blip, recovery eyed
    * BOJ likely to ease policy, overhaul framework next week

    By Leika Kihara and Kaori Kaneko
    TOKYO, March 29 (Reuters) - Japan's factory output
unexpectedly dipped in February on a drop in electronics
production and consumer prices fell again, underscoring the
challenge the central bank faces in engineering a sustained
recovery and achieving its 2 percent inflation target.
    Exporters are hoping to see the benefits of a weaker yen,
the product of the new government's push for massive fiscal and
monetary stimulus, in coming months, but they are also reliant
on global demand improving for that upswing to happen.
    Industrial output slid 0.1 percent last month, pulled down
by a 5 percent drop in electronics output. Expectations had been
for a rise of 2.6 percent, and the gap weighed on investor
sentiment, with Nikkei share average flat at the
midsession break on the last trading day of the fiscal year.
    Core consumer prices also fell 0.3 percent from a year
earlier, strengthening the case for the Bank of Japan to ease
monetary policy further at its policy meeting next week.
    The BOJ is likely to start open-ended asset purchases
immediately rather than in 2014 and consider setting a new
target to buy longer-dated bonds, sources say, in a show of its
resolve to beat nearly two decades of deflation. 
    New BOJ Governor Haruhiko Kuroda has set an ambitious target
of achieving the central bank's 2 percent inflation target in
two years, but many analysts see that as unrealistic.
    "It will take about six months for a weaker yen to be felt 
in exports, while overseas economies including China have not 
yet gained momentum in their recovery," said Takeshi Minami,
chief economist at Norinchukin Research Institute in Tokyo.
    The drop in output followed a 0.3 percent rise in January
and a 2.4 percent gain in December last year, data from the
Ministry of Economy, Trade and Industry showed on Friday.
    Most of the decline was due to a 5.0 percent drop in output
of electronic parts. Companies may have over-estimated demand
for smartphones, forcing them to cut output when orders were
weaker than expected, analysts said. 
    Media reports earlier this year said Apple Inc had
slashed orders for iPhone screens and other components from its
Asian suppliers, hurting Japanese parts makers such as Sharp
    "Demand for smartphones is growing but the increase wasn't
as fast as companies expected. Still, demand isn't declining
sharply, so there's no big change to our forecast that Japanese
exports and output will soon recover," said Yoshiki Shinke,
chief economist at Dai-ichi Life Research Institute in Tokyo.
    Companies remained upbeat, suggesting the economy remained
on track for a gradual recovery from last year's shallow
recession. Manufacturers surveyed by the ministry expect output
to rise 1.0 percent in March and 0.6 percent in April.
    The government maintained its assessment that output was
bottoming out and showing some signs of a pick-up, as 10 out of
16 sectors surveyed saw increases in production including car
makers, which benefitted from strong sales in the United States.
    Dai-ichi's Shinke said the benefits of the weakening yen,
which hit a 3-1/2 year low against the dollar this month, should
be seen in exports from the April-June quarter, or the following
quarter at the latest.
    In another encouraging sign, the Markit/JMMA Japan
Manufacturing Purchasing Managers survey showed overall
manufacturing activity growing in March for the first time in 10
    Separate data from the Internal Affairs ministry showed core
consumer prices, which exclude fresh food but include energy
costs, fell 0.3 percent in February from a year earlier, a
fourth straight month of declines. That was a slightly smaller
fall than a median market forecast of a 0.4 percent drop. 
    March data for the Tokyo area, available a month earlier
than nationwide data, showed the trend extending with core
prices slipping 0.5 percent.
    However, declines in consumer prices are likely to slow in
coming months as the weak yen pushes up the cost of energy
imports and as fiscal spending narrows the output gap,
economists say.
    Japan has been mired in mild deflation for almost two
decades, and Prime Minister Shinzo Abe has made economic revival
and escape from deflation top priorities.
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