Japan's Industrial Output Falls 2% as Exports Decline

By Jason Clenfield

July 30 (Bloomberg) -- Japan's industrial production fell last month after a global slowdown caused overseas shipments to decline for the first time in four years.

Factory output dropped 2 percent from May, when it rose 2.8 percent, the Trade Ministry said today in Tokyo. The median estimate of 37 economists surveyed by Bloomberg News was for a 1.7 percent decline.

Japan's biggest export markets have been hit by the credit crunch stemming from the U.S. housing recession, while higher prices at home have made consumers reluctant to spend. Toyota Motor Corp. and Honda Motor Co., the nation's two largest automakers, this month cut sales forecasts for 2008 as global demand cools.

``There is mounting concern that the economy will deteriorate further,'' said Masaru Hamasaki, a senior strategist at Toyota Asset Management Co. in Tokyo.

The yen was little changed, trading at 108.07 per dollar as of 9:22 a.m. in Tokyo from 108.06 before the report was released.

The Trade Ministry lowered its assessment of industrial production, saying output is weakening after previously describing it as flat with signs of weakness. Companies plan to cut production 0.2 percent in July and 0.6 percent in August, the survey showed.

The June drop completes two quarters of declining production, the first back-to-back contraction since 2001, when the country was in a recession.

Not Recession

``We're not looking at a Japanese recession but we are looking at a very subdued year and industrial production is one indicator of that,'' said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney.

Japan's economy, the world's second largest, probably contracted an annualized 0.5 percent last quarter, economists estimate a report to show next month. Exports, the main driver of the current expansion, fell in June for the first time since 2003. Shipments to the U.S. and Europe declined.

Toyota this week cut its global sales forecast by 3.6 percent, citing falling demand for its pickup trucks in the U.S., the company's largest market. Honda Motor Co., which reduced domestic production by almost 12 percent in the first half of the year, last week lowered its sales and profit estimates.

``Exports have been losing steam, particularly those to Asian nations,'' Toyota Asset's Hamasaki said. Asia ``has been making up for a decline in demand from the U.S., but the region has failed to pull its weight recently.''

Cut Forecast

Goldman Sachs Group Inc. cut its economic growth forecast for Asia this week, saying exports are weakening and higher interest rates will discourage domestic investment. The regional economy, excluding Japan, will grow 8 percent this year, slower than the 8.2 percent Goldman previously predicted and weaker than last year's 9.4 percent expansion.

Still, the Japan's economy is probably more resilient now than it was seven years ago, economists and policy makers say. Bank of Japan board member Atsushi Mizuno said last week Japan will probably avoid a ``deep adjustment'' because companies don't have excess inventories or labor.

``There aren't too many reasons why Japanese corporates would go through a slash-and-burn phase where they really cut back,'' said Westpac's McKay. ``If you look at inventories versus shipments, companies are not in a situation where they've over-produced. They're running pretty lean.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net