Japan’s Factory Output Rises 5.9%, Third Monthly Gain

By Jason Clenfield and Tatsuo Ito

June 29 (Bloomberg) -- Japan’s industrial output rose for a third month in May as companies rebuilt inventories and the economy started to climb out of its deepest postwar recession.

Production increased 5.9 percent from a month earlier, the Trade Ministry said today in Tokyo, matching a gain in April that was the fastest since 1953. Economists surveyed by Bloomberg predicted a 7 percent increase, and factories were still producing 29.5 percent less than in May last year.

Manufacturers forecast output will advance this month and next, albeit at a slower pace, and economists expect the Bank of Japan’s Tankan survey this week to show sentiment among large manufacturers rebounded from a record low. The figures provide the latest evidence that the world recession is moderating as central banks flood their economies with cash and governments spend $2.2 trillion to prop up demand.

“Today’s data suggest companies are clearing inventories steadily and now the biggest focus is shifting to what happens after the inventory adjustment is completed,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “We have yet to see a pickup in final demand, which is crucial for Japan’s economy to sustain a recovery.”

A separate ministry report showed retail sales fell 2.8 percent in May from a year earlier, a ninth monthly decline, as a worsening job market forced households to cut back. Sales were unchanged from April.

Stocks Rise

The Nikkei 225 Stock Average added 0.4 percent at the lunch break in Tokyo, taking its gains to 41 percent from a 26- year low on March 10. Rengo Co., the nation’s biggest maker of cardboard boxes, surged 5.9 percent. The yen traded at 95.56 per dollar from 95.19 before the reports were published.

Production has risen for three months running, following a five-month losing streak that left about half of the country’s factory capacity sitting idle as of April. The largest output increase on record was 7.9 percent in March 1953, near the end of the Korean War.

Gains in production will slow to 3.1 percent in June and 0.9 percent next month, the ministry said, indicating that the inventory restocking may soon run its course. “Momentum is gradually fading,” said Muto at Sumitomo Mitsui.

The Organization for Economic Cooperation and Development raised its forecast for its 30 member nations for the first time in two years last week, and reports showed the U.S. economy is pulling out of its slump. Consumer spending advanced for the first time in three months in May and household sentiment rose to the highest level since February 2008.

Tankan Survey

An index of sentiment among large manufacturers will climb for the first time in a year to minus 43 from a record low of minus 58, economists predict the Tankan will show on July 1. A negative number means pessimists still outnumber optimists.

Japan’s economy is likely to grow at a 2.3 percent annual pace this quarter, according to economists surveyed by Bloomberg, following the previous period’s record 14.2 percent contraction.

China’s 4 trillion yuan ($586 billion) in government spending is feeding demand for Japan’s heavy equipment, autos and materials. China this year surpassed the U.S. as Japan’s biggest export customer.

“The impact of China’s infrastructure building has started to emerge,” Taizo Kayata, senior executive officer in charge of China operations at Komatsu Ltd., Japan’s biggest maker of construction equipment. Kayata said Chinese sales probably grew between 10 percent and 20 percent in June.

U.S., Europe

Still, rising unemployment in the U.S. and Europe may limit the rebound for Japan’s manufacturers. Nissan Motor Co. Chief Executive Officer Carlos Ghosn said last week that the U.S. market isn’t recovering. The company, which is forecasting its second annual loss, cut domestic production by 36 percent in May from a year earlier.

Job and wage cuts will probably curtail spending by Japanese consumers, which makes up more than half of the economy. Reports tomorrow are expected to show the unemployment rate rose to 5.2 percent in May and wages slid for a 12th month, extending their longest losing streak in five years, according to economists surveyed by Bloomberg.

Panasonic Corp., the world’s largest maker of plasma televisions, last week said it will reduce the annual salaries of its 10,000 managers this year.

“Consumer spending will remain weak for a while as long as the deterioration in the job market and wages continues,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “Japan’s recovery will be very weak.”

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