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Japan May Industrial Output Falls Unexpectedly

Reuters
Wednesday, 27 Jun 2007 | 11:21 PM ET

Japan's industrial production unexpectedly fell in May from a month earlier, casting doubt on an anticipated rebound in output and raising the hurdle for the Bank of Japan to raise rates in the coming months.

Market players are looking ahead to consumer price data due out on Friday and the BOJ's quarterly tankan survey next Monday for clues on whether the central bank will raise rates in August as markets widely expect.

Industrial output fell 0.4% in May from April, government data showed on Thursday, much weaker than a median market forecast for a 0.8% rise and marking the third straight month of decline.

The weaker-than-expected reading hurt the yen, which slipped to near 123.35 to the dollar from 123.20.

"It's an unexpectedly weak figure," said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute. "It heightens the possibility for output to post negative quarter-on-quarter growth in April-June after declining in January-March.

"The figures could be a negative surprise for the BOJ, which had expected output to turn positive in April-June," he said, adding that the data may prompt the bank to become somewhat cautious about the outlook for the economy.

Manufacturers' output -- the core component of production -- is expected to rise 1.9% in June and rise 1.7% in July, the data from the Ministry of Economy, Trade and Industry showed.

Still, the ministry downgraded its view on output, saying it is flattening. That compared with the previous month's assessment that output was in a moderately rising trend.

Industrial production fell in January-March for the first time in six quarters, but many economists thought the drop was a reaction to a sharp rise in October-December and that output would rebound in April-June.

The May output data may call such thinking into question and heighten worries over Japan's corporate-sector strength.

Japan is currently enjoying its longest period of expansion in the postwar era, albeit at a slower pace than in previous booms, on firmness in corporate capital spending and exports.

The BOJ has left monetary policy unchanged since February when it raised the key overnight call rate target by a quarter point to 0.5%, its first rate hike since last July.

The central bank has been saying it would adjust rates gradually in line with improvements in the economy and prices, and many analysts expect the next rate hike to come as early as August.

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