Japan Industrial Output Jumps for Third Month

Japanese industrial output jumped 5.9 percent in May as car and electronics production recovered from a deep slump, but analysts said the outlook remained murky once the effects of government stimulus wear off.

AP Factory, Anshan, China

Manufacturers forecast a further 3.1 percent rise in June and a tepid 0.9 percent increase in July, but production is still 29.5 percent lower than a year ago.

"Output has been making big gains since February as manufacturers try to make up for overshoots in inventory cuts last year, but final demand is still weak and we expect output to dip again once inventory has been restocked," said Junko Nishioka, chief economist at RBS Securities.

"Japan's economy won't bounce back in the true sense until the global economy, and especially the U.S. economy, recovers. And that won't be until the second half of this year or early next year."

Inventories have dropped for five months in a row as the collapse of U.S. investment bank Lehman Brothers last September sent Japan's key export markets plunging, prompting huge production cuts.

Auto makers, in particular, have since put back many of the factory shifts they cut as governments around the world stimulate car buying to try to restore the economy.

Car production jumped 24.8 pct in Japan in May with inventories rising for the first time in three months, while electronic parts production rose 10.5 percent.

The 5.9 percent rise in overall industrial output matched the gain seen in April but lagged the median market forecast for a 7.0 percent rise.

Economists expect output to rise for a few more months as Japanese manufacturers rebuild stocks after cutting inventories more aggressively than rivals in other countries.

That should help to push the Japanese economy out of its deepest recession in modern times, with growth of 0.4 percent seen in April-June after four straight quarters of contraction, Japan's longest recession on record.

The Bank of Japan's tankan business survey due out on Wednesday is likely to show the mood among big Japanese manufacturers improving from record lows a quarter ago.

Still, the sharp recession, in which the economy shrank a total of 8.8 percent, leaves huge slack in factories and employment and analysts question whether the recovery is sustainable.

"The pace of recovery is going to slow down in the coming months. Calculating from the manufacturers' output forecasts, production will grow 8.7 percent in April-June," said Maiko Noguchi, a senior economist at Daiwa SMBC.

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"Growth in the next quarter will be much smaller, as the effect of progress in inventory adjustment will fade away."

With much capacity still sitting idle at many factories, capital expenditure is seen sluggish.

Domestic consumption, which had seen limited recovery even during boom years as the population ages, is likely to be weak with the country's jobless rate seen rising further from a 5-1/2-year high of 5 percent hit in April.

Highlighting soft consumption, retail sales were flat in May seasonally adjusted, and 2.8 percent lower than a year earlier.

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