Japan's Industrial Production Declines as U.S. Demand Plunges

By Jason Clenfield

Sept. 30 (Bloomberg) -- Japan's industrial production fell more than economists estimated in August as automakers cut output and exports to the U.S. declined the most on record.

Factory output dropped 3.5 percent from July, when it rose 1.3 percent, the Trade Ministry said today in Tokyo. The median estimate of 34 economists surveyed by Bloomberg News was for a 2.4 percent decline.

Auto shipments to the U.S. plunged 30 percent in August amid a widening financial crisis that has put some of Wall Street's biggest firms out of business. Japan's three largest automakers -- Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. -- all cut domestic production last month.

``The question is: how much worse are the U.S. and Europe going to get?'' said David Cohen, director of Asian Economic Forecasting at Action Economics in Singapore. ``The Asian economies are also slowing, so they might not be able to keep the ball rolling.''

Other reports today showed domestic demand is also weakening. The unemployment rate climbed to a two-year high of 4.2 percent in August and household spending dropped 4 percent, the most since September 2006, the government said. The ratio of jobs available to each applicant slid to a four-year low.

The economy is unlikely to recover until exports improve, Economic and Fiscal Policy Minister Kaoru Yosano said last week after a report showed that Japan had a trade deficit in August.

Tankan Confidence

The Bank of Japan's quarterly Tankan survey due tomorrow is expected to show sentiment among Japan's largest manufacturers fell in September to its lowest level since 2003. Despite the drop, economists said confidence will stay well above levels seen during past recessions and companies won't react by scrapping plans to invest in new plant and equipment.

``The Japanese economy isn't desperately ill,'' because companies aren't burdened with the excess labor, capacity and debt that plagued it in previous recessions, Yosano said.

Exports rose 0.3 percent in August, hurting sales for manufacturers and leaving the economy without its main engine of growth. Shipments to the U.S. plunged a record 22 percent. Exports to Europe also fell.

The slowdown overseas is already taking a toll on the smaller companies that supply Japan's biggest makers of cars and electronics. Akebono Brake Industry Co., a Saitama-based Toyota supplier that employs 7,000 workers, last week cut its full-year profit forecast by more than half, citing weak U.S. car sales.

Japan's exporters have cushioned themselves from the impact of the U.S. slowdown by diversifying their markets. Sales in Asia and oil-producing economies helped companies including Toyota and construction equipment-maker Komatsu Ltd. compensate for slumping U.S. demand in the past year.

Those markets are now showing signs of deterioration. Growth in China, which in July surpassed the U.S. as Japan's biggest overseas customer, has slowed for four quarters and both Toyota and Honda have cut production there.

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