Japan's Companies Plan to Cut Output on Global Recession Risk

By Jason Clenfield

Oct. 29 (Bloomberg) -- Japanese companies plan to cut production this month and next as the global financial crisis increases the likelihood of a worldwide recession.

Industrial output will fall 2.3 percent in October and 2.2 percent in November, the Trade Ministry said in Tokyo today. Production climbed 1.2 percent in September from August, when it declined 3.5 percent, the steepest drop in five years.

The government downgraded its assessment of production as the market turmoil chokes off demand for cars and electronics in markets ranging from the U.S. to China to Russia. The Bank of Japan is considering cutting its target interest rate to 0.25 percent from 0.5 percent to boost the world's second-largest economy, the Nikkei newspaper reported today.

``What you have here is a synchronized global slowdown; that's probably a euphemism because it's probably a global recession,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``Japan isn't going to escape that.''

Speculation for a rate cut spurred a decline in the yen, lifting some of the gloom for exporters' earnings and helping stocks rally from a 26-year low. The Nikkei 225 Stock Average surged 6.7 percent as of 9:57 a.m. in Tokyo.

The yen traded at 97.77 per dollar from 98.45 before the production report was published and as high as 91.90 earlier this week. Even after falling the most against the dollar since 1974 yesterday, the currency is up 9 percent this month, making overseas sales of cars and video game consoles less valuable.

Bank of Japan

There is a 62 percent chance the Bank of Japan will halve the benchmark rate to 0.25 percent at a policy board meeting on Oct. 31, up from 8 percent yesterday, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

The government said production is ``falling gradually'' after today's report showed output fell 1.2 percent in the three months ended Sept. 30, the third quarterly decline. That capped the longest losing streak since Japan's last recession in 2001.

The global slowdown has probably ended the economy's six- year expansion, the government said last week.

The Nikkei fell to the lowest since 1982 this week as the prospect of a world recession prompted exporters including Canon Inc. and Sony Corp. to slash profit forecasts.

Canon, which makes 80 percent of its sales overseas, forecast net income will drop this fiscal year for the first time since 1999. Sales will fall 5 percent, the camera maker said this week. Sony last week cut its profit forecast for the year ending March, citing falling sales and a stronger yen.

Toyota, Honda

Automakers are also feeling the pinch. Toyota Motor Corp., whose unit sales fell last quarter for the first time in seven years, has cut jobs and lowered output of vehicles bound for the U.S. Honda Motor Co. cut its full-year profit forecast yesterday.

The financial crisis that erased $15 trillion from world stock markets since Lehman Brothers Holdings Inc.'s Sept. 15 bankruptcy has started to take a toll on the emerging markets that Japan counted on as sales slowed in the U.S. and Europe.

China, which in July overtook the U.S. as Japan's biggest export market, grew at its weakest pace in five years last quarter. In Russia and the Middle East, crude oil's 50 percent decline from a record in July is reducing purchasing power.

``With commodity prices coming off, maybe the Russians won't be growing like that anymore,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

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