Japan's December Output Is Higher, Short of Forecast

Japan's industrial production rose less than expected in December and manufacturers saw their output falling in coming months, data showed on Wednesday, suggesting that companies are starting to feel the pinch from slowing U.S. growth and a housing slump at home.

The data, along with fears of a U.S. recession and market turmoil, cast doubt on the Bank of Japan's upbeat view on output although investors were still divided on the chance of a rate cut later this year.

"The data may be a sign that the U.S. economic slowdown is starting to hurt Japanese output through declines in exports," said Takeshi Minami, chief economist at Norinchukin Research Institute. "The Bank of Japan's economic scenario, which is for production and output to remain firm, is quite optimistic, so it may need to be revised down," he said.

Industrial output rose 1.4 percent in December from the previous month, falling short of a consensus market forecast of a 2.0 percent increase.

Manufacturers' output, the core component of production, is expected to fall 0.4 percent in January and to drop 2.2 percent in February, data from the Ministry of Economy, Trade and Industry showed.

Financial markets did not react much to the data, with many traders sitting tight ahead of a Federal Reserve policy meeting later on Wednesday at which the U.S. central bank is widely expected to cut interest rates.

The ministry downgraded its assessment on output, saying it is in a flat trend. The view for November was that production was in a moderate rising trend.

Industrial output has been on a modest uptrend, making small ups and downs without a clear sense of direction since the middle of 2007.

Market players are bracing for the Fed meeting and a heavy week of U.S. data that will give more clarity on whether the world's largest economy is on the verge of recession.

While markets have priced in roughly a 50 percent chance of a BOJ rate cut this year, economists believe that more evidence of damage would be needed for the Japanese central bank to seriously examine such a move.

"The manufacturers' output forecast (for January and February) indicates that a slowdown in the global economy, especially in Europe and the United States, is having an effect on the export-oriented sectors," said Seiji Adachi, senior economist at Deutsche Securities.

"The latest data will make the Bank of Japan more concerned about economic risks arising from overseas, but unlikely to lead it to consider a rate cut," he said.

Other Japanese government data this week showed that the ratio of jobs to applicants hit a two-year low in December but the unemployment rate held steady at 3.8 percent and household spending unexpectedly rose from a year earlier.

But economists remain worried about the outlook for personal consumption, the lion's share of the economy, as prices of food and oil keep rising. Goldman Sachs said in a research report last week that Japan's economy may be already in recession.

Japan's economy grew 0.4 percent in July-September from the previous three months, when it contracted by 0.5 percent. Gross domestic product for the final three months of 2008 is due out on Feb. 14.

The BOJ left rates unchanged at 0.5 percent last week as widely expected. Turbulent markets and a gloomy outlook for the U.S. economy have heightened views that the central bank could abandon its rate-hike bias and cut rates sometime this year.