Japan’s Manufacturing Shows Recovery Signs as Inventories Clear

By Jason Clenfield

March 30 (Bloomberg) -- Japanese companies cut inventories at an unprecedented pace in February and said they would increase production in coming months, indicating the worst of the country’s manufacturing slump may be over.

Inventories fell 4.2 percent last month, the biggest decrease since record-keeping began in 1953, the Trade Ministry said today in Tokyo. Factory output slid 9.4 percent from January, when it plunged a record 10.2 percent.

Production may rise for the first time since September after companies from Toyota Motor Corp. to Nissan Motor Co. burned off stockpiles by temporarily closing plants. Japan’s recession will linger “for the next few quarters” because global demand remains weak, said economist Tetsuro Sugiura.

“The sharp adjustments in production and inventories are probably finished,” said Sugiura, chief economist at Mizuho Research Institute in Tokyo. “But we don’t expect a sharp rebound in production because exports are dropping very significantly.”

The second monthly reduction in stockpiles brought them to the lowest level since August 2007, today’s report showed. Manufacturers said they’ll raise output 2.9 percent in March and 3.1 percent in April, ending a five-month losing streak.

Toyota expects to have adjusted inventories to levels that reflect demand by April, President Katsuaki Watanabe said last week. The carmaker, which cut global output a record 53 percent last month, plans to ease domestic production cuts from May, he said.

Nippon Steel, Nissan

Nippon Steel Corp. last month said production should improve next quarter because customers have used up their supplies. Nissan, Japan’s third-largest automaker, says it will raise domestic output next month.

“Production cuts may already be bottoming out,” said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co. in Tokyo. “That that doesn’t necessarily mean overseas demand is already recovering.”

Exports plunged a record 49.4 percent in February from a year earlier as sales of cars and electronics dried up. The World Trade Organization said last week that global commerce will shrink 9 percent this year, the most since World War II.

Companies have been quicker to react to the drop in demand than in previous slumps, economists said. Manufacturers were reluctant to shed workers and shut plants after Japan’s stock and property bubbles burst in the early 1990s, contributing to the so-called lost decade of economic stagnation.

Learned Lesson

“As a result of that experience, Japanese managers have come to believe they need to adjust very quickly in order to avoid the excess inventories, capacity and debt of the past,” said Sugiura at Mizuho Research.

Japanese companies aren’t alone in slashing production to get rid of stockpiles. U.S. factory inventories have fallen every month since September; in December, they dropped by 1.9 percent, the biggest monthly decline in 62 years of record- keeping. A JPMorgan Chase & Co. index of global inventory growth is close to an 11-year low, economist David Hensley said in a March 11 note.

U.S.-based Caterpillar Inc., the world’s largest maker of construction equipment, has been allowing dealers to cancel orders as it cuts production. Renault SA, France’s second- biggest carmaker, said in January that “inventory management and reduction will remain a priority throughout 2009.”

“Companies have succeeded, as you can see in today’s data, at cutting inventories back,” said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. “They’re starting to move production back more into line with demand, which is still depressed but obviously going to be a stronger level than the January-February period.”

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