Japan's Factories Showing Signs of Life

Japan's industrial output rose twice as fast as expected in March, the first gain in six months, in another sign that the plunge in production and exports may be nearing an end.

AP

Manufacturers forecast further gains in production in the coming months, suggesting output may be bottoming out after the sharpest decline on record in the first quarter of the year.

The Bank of Japan held steady its monetary policy as it gauges the impact of recent steps to help the economy cope with its worst recession since World War Two.

The 1.6 percent rise in industrial output follows a small rise in exports reported earlier in April, although shipments are still running around half the levels of a year ago.

The upbeat data and the Federal Reserve's suggestion that the U.S. recession may be easing pushed down bond futures and boosted the Nikkei 225 Average by 3.5 percent. Economists were cautiously optimistic.

"Industrial production in the April-June quarter will be quite strong, but it is difficult to expect it to continue to rise after that," said Satoru Ogasawara, an economist at Credit Suisse. "We are not expecting a V-shaped rebound. It will be more like reaching a bottom and then remaining relatively flat for some time."

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 4.3 percent in April and a further 6.1 percent in May, the data showed.

Signaling that the world's No.2 economy probably suffered another big contraction in the first quarter, production tumbled 22.1 percent in January-March as the plunge in global demand for Japanese cars and electronics goods hit factories hard.

It was the biggest quarterly drop since comparable data became available in 1953, marking the fourth straight quarter of decline -- the longest such sequence since 2001.

BOJ To Cut Forecasts

The BOJ kept interest rates at 0.1 percent and limit any action to fine-tuning of existing policies geared to easing of corporate funding strains.

The BOJ's board met a day after the U.S. Federal Reserve kept its benchmark rate near zero and refrained from any new steps to revive the world's biggest economy, in which it said the contraction appeared to be slowing.

Reflecting hopes the global economy may be past the worst phase of recession, the BOJ is due to stick to its main scenario that the economy will start picking up late this year or early in 2010.

But the central bank is likely to acknowledge the depth of the downturn and predict the economy will shrink more than 3 percent in the fiscal year to March 2010 rather than by the 2 percent it forecast in January, despite a record $159 billion stimulus package unveiled this month, BOJ officials say.

That would bring its forecast broadly in line with government and private economists' recent predictions.

More from CNBC.com:

• Obama Says Clearing Away "Wreckage" of Recession
• Chinese Economy Cannot Recover in Isolation
• Save China, Save the World?
• More Asia Pacific News

The BOJ has joined other central banks in expanding its balance sheet to prevent severe funding strains from further derailing the struggling economy. It has bought corporate debt and increased buying of government bonds, a move that would effectively tame rises in bond yields.

With Japanese credit markets having calmed down from last year's tightest strains, analysts say now is the time to wait and see how BOJ and government steps taken so far will work their way through the world's No. 2 economy.

But some lawmakers and market players argue that if overseas economic growth fails to pick up later this year, as Japanese policymakers hope, further fiscal stimulus or increased asset buying by the BOJ might be necessary.

Japan's economic output slumped 3.2 percent in the fourth quarter, and the economy is expected to contract even more in the first quarter, despite some early tentative signs of recovery in exports.

The central bank releases long-term forecasts in April and October that form a base for its monetary policy decisions. It reviews the forecasts in January and July.

Copyright 2009 Reuters. Click for restrictions.