Reuters | TOKYO | Mon Dec 28, 2009 | 12:38pm IST
Japan’s industrial output rose for the ninth consecutive month in November, driven by strong exports and domestic subsidies, but swelling inventories and falling wages threaten to end the longest climb in more than 12 years. Demand from the United States and Asia contributed much to last month’s 2.6 percent rise, government data showed on Monday, supporting the Bank of Japan’s view that the world’s second-largest economy will continue its moderate recovery next year. Economists say overseas demand should prevent a return to recession next year. However, declining wages and weak labour market may outweigh the effect of government subsidies on energy efficient goods, forcing manufacturers to curb output and start selling down inventories built up in anticipation of better sales.
“The latest data shows that Japanese makers of automobiles and home electrical appliances are still hiking their output thanks to the continuing effect of government stimulus as well as strong exports to Asia,” said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo. “But a slowdown is still expected early next year as the effect of stimulus will likely fade.” Japan’s wages fell for the 18th consecutive month in November from a year earlier, in a sign that deflation, or persistently falling prices and incomes, was entrenched. This exposes the central bank to more pressure from the government to ease monetary policy further.
November’s output rise was the biggest in six months and exceeded a median market forecast for a 2.4 percent rise. The benchmark Nikkei closed at a four-month high in reaction to the data and due to hopes that a weakening yen will help the country’s exporters. Production of cars and car parts powered much of the rise output, with Japan’s government having extended subsidies on energy efficient goods until late 2010 and as stimulus measures in other countries support a recovery in overseas demand. Production of transport equipment rose 5.9 percent, the ninth straight month of gains. General machinery output, which includes car parts, rose 6.4 percent, the seventh month of increase. Manufacturers surveyed by the government expect output to rise 3.4 percent in December and further increase by 1.3 percent in January.
Overall inventories rose 0.2 percent in November, the first rise in three months. A breakdown showed that car manufacturers have built up inventories to the highest level since February due to strong demand for hybrid cars. Flat panel TV makers have also boosted inventories to the highest level since January, betting that government subsidies will buoy sales during Japan’s year-end shopping season. But while Monday’s retail sales data for November confirmed strong demand for cars, with domestic sales soaring 21.1 percent from a year ago, the biggest increase in more than 12 years, electronics sales were tepid with annual growth down to 0.6 percent in November from 7.4 percent in October.
“Recovery in industrial production up to now has been a question of making up for depleted inventories. What will become more of a focus now is whether sales will grow in the new financial year. If sales growth is zero, industrial production growth could also be zero,” said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute in Tokyo. The Democratic Party-led government, in office for three months, is determined to keep the economy from slipping back into recession ahead of an election for parliament’s upper house in mid-2010. The Bank of Japan buckled under government pressure this month, calling an emergency meeting to announce a new short-term funding facility and later declaring it would tolerate nothing but price growth.
Commercial banks have so far welcomed the new funding facility and the central bank’s scheme on Monday drew more than seven times more bids than the amount offered. While the central bank has said there is little more it can do with interest rates near zero, it may come under pressure for more action if Japan slips into last month’s 2.6 percent rise, backing the Bank of Japan’s view that the world’s second largest economy will continue its moderate recovery next year, recession or renewed worry about soaring public debt pushes up bond yields, analysts say.