Japan factory production, consumer prices fall

[October 29, 2010]  TOKYO (AP) -- Japan's factories made fewer goods in September as makers of cars and electronic devices cut production while consumer prices fell for the 19th month, underscoring that the economic recovery is losing steam.

Factory output was down 1.9 percent from the previous month following a 0.5 percent fall in August, the government said Friday. The result undershot expectations for a 0.6 percent decline forecast by Kyodo news agency.

Japanese companies are being battered by a strong yen, which is hovering near a historical high versus the dollar, and slowing growth in key overseas markets like the U.S. and China. The yen's appreciation erodes the value of exporters' overseas profits when brought back to Japan and makes their products more expensive in foreign markets.

Further dragging output was the expiration of government subsidies for eco-friendly cars, which affected a wide swath of manufacturers including car companies and their parts makers.

"Industrial production appears to be weakened," the Ministry of Economy, Trade and Industry said in its report.

The central bank on Thursday lowered its economic growth forecasts for Japan and kept interest rates at virtually zero. Major exporters say the yen is cutting into their bottom lines.

Even as Sharp Corp. on Thursday posted solid profits for the third quarter, the electronics maker cut its full-year profit projection by almost half because of the strong yen.

Companies surveyed by the ministry expect output to keep falling this month. They forecast a 3.6 percent fall in October before rising 1.7 percent in November.

Separately, the government said prices fell for the 19th straight month in September as deflation kept its grip on the economy. The key consumer price index, which excludes volatile fresh food prices, fell 1.1 percent from a year earlier.

The preliminary core CPI for Tokyo -- considered a barometer of broader price trends -- fell 0.6 percent in October, pointing toward another nationwide drop this month.

While lower prices may boost individual purchasing power, deflation is generally bad for the economy overall. It plagued Japan during its "Lost Decade" in the 1990s, hampering growth by depressing company profits and sparking wage cuts. It also means that even at zero, interest rates are too high because prices are in negative territory.

Although the Bank of Japan lowered its forecast for economic growth, it left its outlook on prices unchanged, perplexing analysts who say the projections are far too optimistic. The BOJ expects the core CPI to fall 0.4 percent this fiscal year through March then begin to climb in the following year.

Richard Jerram, head of Asian economics at Macquarie Securities, described the projected price rise next year as "implausible."

Jobless numbers also released Friday brought slightly better news. The country's unemployment rate fell to 5 percent from 5.1 percent in August, the government said.

The total number of jobless stood at 3.4 million, down 6.3 percent from the previous year. Those with jobs in September increased 0.2 percent to 63.09 million.

But unemployment remains high by Japanese standards, said Goldman Sachs economist Chiwoong Lee, who expects the jobless rate to hover around 5 percent for the next six months.

"The labor market may have bottomed out, but today's production release confirms employment concerns relating to economic slowdown," he said in a note to clients.

[Associated Press; By TOMOKO A. HOSAKA]

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