Japan Factory Output Rises Least in 4 Months, Retail Sales Drop

By Aki Ito

Aug. 31 (Bloomberg) -- Japan’s factory output rose at the slowest pace in four months in July and retail sales fell, underscoring the challenge for the incoming government to sustain an economic recovery.

Production climbed 1.9 percent from June, when it rose 2.3 percent, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg expected a 1.4 percent gain. Retail sales slid 2.5 percent from a year earlier, an 11th straight drop, extending the longest losing streak since 2003.

Manufacturers were still producing 22.9 percent less than a year ago, and economists say the monthly gains are too slow to prompt companies to invest in equipment and hire workers. The Democratic Party of Japan, which won power for the first time yesterday, inherits record unemployment and deflation as the economy emerges from its worst postwar recession.

“These increases won’t continue forever,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “Gains in production caused by a recovery in final demand normally lead to more business investment and an improvement in the job market. We can’t expect these two for a while, though, because the level at which manufacturers are operating is so low.”

The yen strengthened to 92.75 per dollar at 11:04 a.m. in Tokyo from 93.43 before the reports, on optimism the DPJ may stimulate the economy. The Nikkei 225 Stock Average fell 0.4 percent after climbing as much as 2.2 percent.

A separate report showed wages slumped 4.8 percent in July from a year earlier as companies cut summer bonus payments.

Toyota Cuts Back

Toyota Motor Corp., Japan’s largest automaker, said last week it plans to reduce output by about 220,000 vehicles. The automaker cut domestic production by 29.5 percent in July.

The economy is losing momentum since it emerged from a recession last quarter. Data last week showed the jobless rate reached a postwar high of 5.7 percent in July and household spending fell at the fastest pace in five months.

Manufacturers trimmed production at a record pace in the first quarter in the wake of the global financial crisis. The cuts left them with leeway to rebuild stockpiles as demand recovers.

“Companies reduced their inventories by a considerable amount, and they are still rapidly rebuilding that loss,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute.

Manufacturers plan to increase output 2.4 percent this month and 3.2 percent in September, according to today’s report.

There are signs that plunges in overseas demand are stabilizing, paving the way for sustained increases in production later this year, economist Junko Nishioka said.

‘Small Increments’

“Overseas demand will improve in small increments,” said Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

Exports fell 36.5 percent in July, a report last week showed. Declines have stabilized since demand plunged a record 49 percent in February.

Panasonic Corp., the world’s largest maker of plasma televisions, raised its earnings forecast for the first fiscal half, projecting its net loss to be 100 billion yen, from an earlier estimate of 195 billion yen.

Some 25 trillion yen in Japan’s stimulus spending has included incentives for consumers to buy fuel-efficient cars and eco-friendly home appliances.

Shipments of flat-panel TVs, which qualify for the government’s “eco-point” incentives, rose 41 percent in July from a year earlier, the Japan Electronics and Information Technology Industries Association said last week.

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net