Japan factory output rises, retail sales gain

[February 26, 2010]  TOKYO (AP) -- Japan's industrial output rose for the 11th straight month in January amid rising demand in China and elsewhere in Asia while retail sales gained for the first time in nearly a year and a half. Another decline in consumer prices, meanwhile, cast a shadow over the country's economic recovery.

The 2.5 percent gain in factory output -- a key barometer of Japan's economic health -- from December exceeded expectations. Kyodo News agency's survey of economists forecast growth of 1.1 percent.

Industrial shipments in January rose 2.4 percent month-on-month, the Ministry of Economy, Trade and Industry said Friday, led by general and electronics machinery. Industrial inventories expanded 1 percent.

"In general, production is recovering," the ministry said in a statement.

Economists said rising demand in China and other Asian countries has helped spur production of mainstay Japanese exports like cars and consumer gadgets.

"Industrial output grew in tandem with rising demand in China," said Hiroshi Watanabe, economist at Daiwa Institute of Research. "Japanese exports of vehicles and construction material to China underlined booming demand in the country."

China's economic growth surged to 10.7 percent in the fourth quarter of last year. Recently, the country -- Japan's biggest export market -- has been taking steps to curtail bank lending to cool down its economy to prevent overheating.

Japanese retail sales, meanwhile, rose 2.6 percent in January from a year earlier, the ministry said in a separate report. It marked the first year-on-year gain in 17 months since a gain of 0.7 percent in August of 2008, according to ministry official Kazuhiko Manaka.

Hideki Matsumura, senior economist at Japan Research Institute, said retail sales were hit hard by the global economic slowdown after the collapse of U.S. investment bank Lehman Brothers Holdings in September 2008. A gain after the long downturn was not unexpected given increases in fuel prices and gains in auto sales spurred by tax incentives, Matsumura said.

In a sign of further worry for Japan's economy, however, consistently falling prices failed to improve in January.

The country's key consumer price index, which excludes volatile fresh food prices, fell 1.3 percent from the year before, declining for an 11th straight month, according to the Ministry of Internal Affairs and Communications. That matched a 1.3 percent decline in December.

Japan has been battling periods of deflation -- or a steady decline in prices -- since the 1990s. Deflation is a burden as it can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

The core consumer price figure has improved in recent months, but Matsumura attributed that to gains in gasoline prices. The overall situation regarding deflation "has not improved at all," he said.

Core CPI for the Tokyo area, seen as a barometer of price trends nationwide, retreated 1.8 percent in February, a slight improvement from January's 2 percent decline.

Japan's central bank has kept interest rates at a super low 1 percent for more than a year to boost the economy and help stem falling prices. The government has urged it to do more in terms of fresh policy steps -- such as setting an inflation target -- but the bank has resisted.

Japan's economy grew at an annual pace of 4.6 percent in the October-December period, the government said earlier this month. Gross domestic product, or the total value of the nation's goods and services, has climbed for three straight quarters.

[Associated Press; By KELLY OLSEN]

Associated Press writer Shino Yusa contributed to this report.

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