Weak industrial output weighs on Japanese economy

[October 29, 2008]  TOKYO (AP) -- Japan painted an dire outlook for industrial output Wednesday, adding to mounting evidence of broader economic gloom ahead and fueling speculation that the central bank may respond by cutting interest rates soon.

Faced with slumping demand at home and abroad, exporters in particular are sharply scaling back production and bracing for worse amid fears of a looming global recession.

For the July-September period, Japanese industrial output fell 1.2 percent from the previous three months in its third straight quarter of declines, the government said. It expects production to fall 2.3 percent in October and 2.2 percent in November, signaling an even bigger contraction this quarter.

Economists say the numbers point to a troubling reality for the world's second-largest economy.

Since the early 1990s exporters drove Japan's economic recovery, fueled by surging demand for its cars and cameras. But faltering under the weight of global turmoil as well as a stronger yen, they now threaten to pull Japan back into recession.

"This engine of growth has disappeared now that the global economy is in correction mode, however, and while the government is expected to announce a second round of emergency measures at the end of this month, we see very little prospect of such action providing a substantial boost for domestic demand," said Credit Suisse economists Hiromichi Shirakawa and Satoru Ogasawara in a report.

"Given this state of affairs, we do not expect to see a fully fledged recovery in industrial production until overseas economies start to improve," he said.

Recent earnings reports by major exporters are starting to reveal the extent of the damage so far.

Sony Corp. reported a 72 percent plunge in quarterly profit on Wednesday, and Honda Motor Co. on Tuesday lowered its full-year earnings projections after reporting a 41 percent drop in quarterly profit.

Automakers plan to reduce production by 5.3 percent in October and 8.5 percent in November, the Ministry of Economy, Trade and Industry said.

The financial crisis and weak economic data have sparked speculation that the Bank of Japan may loosen monetary policy.

The Nikkei financial daily reported Wednesday that the central bank was leaning toward halving its key interest rate to 0.25 percent in what would be the first rate cut since March 2001. Markets have begun to price in a possible cut as well.

JPMorgan economist Masaaki Kanno said what while the central bank will likely lower rates by the end of the year, he doubts it will happen at its next policy-setting meeting Friday, citing the bank's still relatively optimistic view on the economy.

"We interpret the BOJ's surprising stubbornness as a message that the BOJ does not want to cut the rate so soon," Kanno said in a report. "The question is whether the recent financial turmoil and today's weak IP report (and the expected weak data coming this week) are enough for the BOJ to take action this week."

The government on Friday will release inflation, unemployment and household spending data in the morning, before the central bank announces its decision.

For September at least, Japanese industrial output beat expectations, climbing 1.2 percent from the previous month when it plunged 3.5 percent. Economists surveyed by Kyodo news agency had forecast an average 0.3 percent gain.

A boost in production by manufacturers of general machinery, transport equipment and electronics parts and devices helped push the figure into positive territory, the data showed.

[Associated Press; By TOMOKO A. HOSAKA]

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