Japan Manufacturers Probably Cut Production as Turmoil Deepened

By Jason Clenfield

Nov. 26 (Bloomberg) -- Japanese manufacturers probably cut production in October as a worsening global financial crisis weakened exports of the country’s cars and electronics, economists predict a report will show this week.

Factory output declined 2.5 percent from September, according to the median estimate of 33 economists surveyed by Bloomberg News. The Trade Ministry releases the figures on Nov. 28 at 8:50 a.m. in Tokyo.

Exports fell at the fastest pace in almost seven years last month, and companies are slashing production, investment and jobs in anticipation that the slump will deepen. Toyota Motor Corp. is firing half of its temporary staff; Sharp Corp. is considering cutting workers and output of flat-panel televisions; and Canon Inc. postponed building a printer cartridge plant.

“The manufacturing sector has been hit the hardest,” said Tetsuro Sugiura, chief economist at Mizuho Research Institute Ltd. in Tokyo. “They’re feeling a lot of uncertainty about the future, particularly about orders from foreign countries.”

The world’s second-largest economy shrank last quarter, entering its first recession since 2001. Figures since then have shown further deterioration: exports tumbled 7.7 percent last month, and shipments to Asia, where Japanese companies make about half of their overseas sales, fell for the first time since 2002.

The International Monetary Fund predicts the U.S., Europe and Japan will all shrink next year in the first simultaneous contraction since World War II. Goldman Sachs Group Inc. said last week that the recession in the U.S., Japan’s biggest market, would be deeper than previously predicted, with gross domestic product likely to fall at an annual 5 percent rate this quarter.

Job Losses

Toyota, which forecasts profit will decrease this fiscal year by about 70 percent, cut domestic production of cars bound for the U.S. and said last week that it will halve the number of temporary workers to 3,000. Honda Motor Corp. forecasts it may not turn a profit in the second half of the year. The automaker said last week it will reduce production of some sedans by 40,000 units and fire 270 contract workers.

“The negative pressure on the labor market is building,” said Mizuho’s Sugiura. “Companies have to cut costs and the biggest costs for the corporate sector are labor costs.”

Businesses and households may get some relief as declining oil and commodity prices cool inflation.

Consumer prices excluding fresh food probably rose 1.9 percent in October from a year earlier, slowing from 2.3 percent in the previous month, economists predict a separate report will show on Nov. 28. Core inflation rose to a decade-high 2.4 percent in August, driven by record crude oil prices.

Easing Inflation

Slower inflation could help paychecks go further for consumers, whose sentiment, like that in the U.S., is at a record low. The Bank of Japan forecasts core prices will be flat in the year starting April.

“The really big news is going to be the plummeting headline inflation number and the boost to real incomes,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Households may also get a lift from a 5 trillion yen ($52 billion) stimulus package unveiled by Prime Minister Taro Aso last month.

Nor is the production story all bad. Although output has fallen every quarter this year, the declines are less dramatic than they were during the last recession of 2001. Production slid an average of 0.9 percent in the past three quarters compared with 3.4 percent in the previous downturn.

Companies are showing some “resilience,” Sugiura said.

“They’ve accumulated a lot of cash and they’ve slashed excess inventories and labor costs,” he said. “They have much greater room to maneuver against the slowdown of the economy than before.”

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