Japan Output Continues Recovery, but Outlook Murky - Wall Street Journal

TOKYO—Japanese industrial production continued to bounce back after the devastating impact of the March 11 earthquake and tsunami, rising for the fifth-straight month in August as the transportation, steel and electronic component sectors regained their footing.

WSJ's Andrew Monahan discusses Japan's industrial production figures, up for the 5th straight month in August. Global economic conditions, however, could prove challenging for Japan's economy in the coming months. Photo: REUTERS/Kim Kyung-Hoon

But the outlook for production over the next few months remains murky as the yen's strength, the financial crisis in the euro zone and a slowdown in the U.S. economy pose a threat to Japan's fragile recovery.

Output rose a seasonally adjusted 0.8% in August from the previous month, data from the Ministry of Economy, Trade and Industry showed on Friday.

While the ministry said industrial production has now almost completely recovered from the effects of the earthquake and tsunami, the result was below a median forecast for a 1.5% rise in a survey of economists by Dow Jones Newswires and the Nikkei. In July, production rose 0.4% from the previous month.

In a sign there may be a bumpy road ahead for production in the coming months, manufacturers polled by the ministry expect their orders to fall 2.5% in September, and climb 3.8% in October.

Manufacturers have now largely overcome post-quake production disruptions and the threat of power shortages due to the Fukushima Daiichi nuclear crisis and analysts are now focusing on how Japan will cope with the economic turmoil overseas as well as the yen's appreciation.

"External factors affected production negatively...the yen's strength was also a negative factor," Japan Research Institute chief economist Hidehiko Fujii said about Friday's output data. Still, the outlook for the Japanese economy may not change much, he added.

Other data released on Friday painted a similar picture of Japan's economy recovering from the impact of the March 11 disasters.

Japan's unemployment rate fell to 4.3% in August from 4.7% in July, improving for the first time in three months. But an official briefing reporters on the data noted that the drop in the figure does not necessarily mean an improvement in the labor market.

Meanwhile, the nation's core consumer price index rose for the second-straight month in August, partly due to an increase in energy prices.

The nation's core CPI rose 0.2% from a year earlier in the month, data from the Ministry of Internal Affairs and Communication showed, higher than the median forecast for a 0.1% gain in a poll of economists surveyed by Dow Jones and the Nikkei.

Core CPI for the Tokyo metropolitan area—an early indicator of price trends for the rest of Japan—fell 0.1% on year in September. In August, it declined 0.2%.

Write to Andrew Monahan at andrew.monahan@dowjones.net

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BOJ Miyao warns of Europe woes, risks to Japan recovery (Reuters)

HAKODATE, Japan (Reuters) – Japan's economy may get less support than expected from overseas demand as Europe's debt woes escalate and U.S. growth slows sharply, a Bank of Japan policymaker said, painting a bleak picture for the prospects of recovery from the March earthquake and tsunami.

There are already signs Europe's debt woes are hurting that region's banking sector and economy, BOJ board member Ryuzo Miyao said on Wednesday, warning that fast-growing Asian and emerging markets may begin to feel the pinch as the recovery in advanced economies loses steam.

"European financial and capital markets remain unstable," Miyao said in a speech to business leaders in Hakodate, in the northernmost Japanese prefecture of Hokkaido.

"Risks surrounding Europe's debt problem are heightening."

Miyao, a former academic who is among the most pessimistic board members on the economy, stuck to the BOJ's forecast of a moderate recovery later this year. But he warned of mounting risks such as persistent yen rises and higher energy costs.

"Overseas demand may fall more than initially expected as the recovery in U.S. and European economies slows. That may weigh on Japan's recovery," he said.

On monetary policy, Miyao repeated the BOJ's standard view that it will act appropriately when necessary, signaling the central bank's readiness to ease policy further if Japan's recovery prospects come under threat.

"Miyao toed the BOJ's line on the underlying economy but struck a cautious note on the outlook due to Europe's debt problems, signaling the chance it may cut its projections in its twice-yearly outlook report in October," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The BOJ may be forced to ease policy further as early as next month if strains in financial markets send the yen surging and share prices tumbling."

The BOJ eased monetary policy last month by topping up its asset buying program on the same day that Tokyo intervened in the currency market to stem sharp rises in the yen.

It kept its monetary settings steady this month but has expressed its readiness to ease further if its forecast of a moderate economic recovery later this year is threatened.

Analysts polled by Reuters expected the BOJ to ease monetary policy again next month by topping up its asset buying scheme again, with the most likely trigger seen as a renewed yen spike that hurts the recovery.

A former academic and an expert on monetary policy, Miyao has voted with the majority since joining the board last year and has mostly toed the central bank's official line on the economy.

(Editing by Edmund Klamann and Chris Gallagher)

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BOJ's Miyao Highlights Risks for Japan Recovery - Wall Street Journal

HAKODATE—Bank of Japan policy board member Ryuzo Miyao said on Wednesday that the central bank will take action if necessary to stop downside risks from undermining the nation's economic recovery, bolstering the view that the BOJ may soon take further easing steps to counter the impact of the strong yen and slowing overseas demand.

"I hope the powerful recovery, mainly in production, will continue after the autumn, but there are several uneasy factors," which include the possibility of slower overseas demand, the yen's stubborn uptrend, potentially higher electricity costs and expectations for prolonged deflation, Mr. Miyao said in a speech to business leaders in Hakodate, northern Japan.

Issei Kato/Reuters Bank of Japan board member Ryuzo Miyao speaks to the media during a news conference at the BOJ headquarters in Tokyo in 2010.

"If judged necessary after carefully examining economic and price conditions, including foreign exchange moves, overseas economies as well as local economies, we will take appropriate steps," Mr. Miyao said at a post-speech press conference, stressing that the BOJ's policy doesn't depend only on foreign exchange rates.

Mr. Miyao's cautious remarks will likely add to speculation that the BOJ will soon pursue additional monetary easing measures. Although the bank's policy board decided to stand pat at its latest meeting last week, many economists expect the BOJ to take action within the coming months.

Given that the pace of the U.S. economic recovery is "significantly" slowing and risks surrounding European sovereign debt problems are increasing, overseas demand could weaken more than initially expected, causing problems for Japan's export-dependant economy, Mr. Miyao said.

Mr. Miyao also voiced concern that the stubbornly strong yen may further undermine the country's industrial production base, pushing companies to shift production overseas and eventually weighing on growth.

Still, he said data released so far haven't shown that the high yen has caused a sharp deterioration in business sentiment among domestic firms.

Fears over the health of the global economy have pushed the yen—regarded as a safe-haven—to record highs. After falling to an all-time low of ¥75.94 last month, the dollar stood at around ¥76.90 as of 3.28pm local time on Wednesday.

In the face of the strong yen, the BOJ in August increased the size of its special fund, which includes asset purchases and low-cost loans, by ¥10 trillion to ¥50 trillion, in tandem with government intervention in the currency markets.

The central bank has been buying a variety of financial assets—from government and corporate debt to exchange-traded funds and real estate investment trusts—in a bid to lower interest rates and risk premiums.

Though he didn't specify any preference on policy options, he said current interest-rate levels are "most appropriate" at this point. The BOJ's key policy rate is currently in a 0.0%-0.1% range, while interest on excessive reserves is at 0.1%.

Write to Megumi Fujikawa at megumi.fujikawa@dowjones.com

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On day of past defeat, Kan urges recovery

Prime Minister Naoto Kan pledged Monday on the 66th anniversary of the end of World War II that the nation would recover from the March 11 triple disaster, likening the hardship to postwar reconstruction.

For the fallen: People pray for the war dead Monday at Tokyo's Chidorigafuchi National Cemetery, where the remains of unknown soldiers and civilians who died overseas during the war are buried. KYODO PHOTO

"Our nation has stood up from the ashes of war and overcome many trials and tribulations with the efforts of each and every citizen," Kan said at the Nippon Budokan Hall in Tokyo's Chiyoda Ward, where the ceremony marking the historic day of Japan's surrender was held.

"With this experience, we promise to boldly rebuild the disaster-stricken areas, as well as Japan," Kan said, while also vowing to renew the nation's pledge to never again engage in war.

The annual ceremony comes at a time when the nation struggles to recover in the aftermath of the massive earthquake and tsunami that devastated the Tohoku region and crippled nuclear reactors in Fukushima Prefecture, causing widespread panic and economic damage estimated to climb over ¥16 trillion.

It is also likely to be Kan's last time to attend the ceremony as prime minister.

Kan is expected to step down soon after two bills he has set as a precondition for his exit, the bond-issuance bill and legislation to promote renewable energy, clear the Diet at month's end.

The event at Nippon Budokan commemorates the approximately 3 million service members and civilians who died in the war, and was attended by roughly 6,100 people.

Following a minute of silence, Emperor Akihito took to the podium and delivered a speech expressing his heartfelt sorrow over those that died in war, and called for world peace and Japan's further development.

Lower House Speaker Takahiro Yokomichi said that the sight of coastal cities wiped out from the March 11 disaster was reminiscent of the burned ruins from air raids during the war, as well as Hiroshima and Nagasaki after the atomic bombings.

"The sorrow of those who have lost their homes and had family washed away from the tsunami is no different from the sorrow wrought by the war," he said, adding that it was important that everyone remember the past and learn from its mistakes.

Yokomichi also lamented the fact that Japan has again been forced to suffer from radiation fears despite experiencing and knowing firsthand its horror from past experiences.

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Japan on cusp of recovery after Q2; yen clouds outlook (Reuters)

TOKYO (Reuters) – Japan's economy shrank much less than expected in the second quarter as companies made strides in restoring output after the devastating earthquake in March, but a soaring yen and slowing global growth cloud the prospects for a sustained recovery.

Analysts expect the world's third-largest economy to rebound in July-September, probably expanding at the fastest rate among major industrialized nations as exports and factory output return to pre-disaster levels. But growing risks to this scenario could strain a depleted arsenal of policy tools.

Gross domestic product fell 0.3 percent in the second quarter, less than a median forecast for a 0.7 percent contraction and a 0.9 percent decline in January-March.

The better-than-expected reading helped push up the Nikkei benchmark by about 1 percent, which has also tracked gains in global markets last week supported by a short-selling ban on financial stocks in Europe.

However, worries that Europe's sovereign debt woes could escalate into another global crisis could rob Japan of much-needed export demand, increasing the chance of further yen-selling intervention and monetary easing to secure economic recovery.

Government officials highlighted risks posed by the strong yen and global slowdown to the export-reliant economy, saying that they stood ready to act against rapid yen rises while urging the central bank to keep supporting the economy.

"The economy will show a V-shaped rebound in July-September as supply chains are on the mend to help boost exports," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

"But the momentum will weaken from October-December onwards, although it won't fall back into a slump, as the pace of recovery in external demand slows. In fact, the world economy may even start sputtering," he said.

Economics Minister Kaoru Yosano urged the Bank of Japan to keep helping the recovery with ample liquidity injections into the market and ultra-loose monetary policy stance.

"We will be closely watching the impact growing global economic uncertainty and yen rises would have on Japan's economy," Yosano told reporters.

Market intervention combined with a further increase of the central bank's asset buying operation and some form of financial support for most affected companies are the few remaining options Tokyo has to cope with the yen's strength.

The yen, driven by broad dollar weakness, has risen about 5 percent in just over a month to just below its all time highs of 76.25 to the dollar and above levels major Japanese companies have been using in their earnings estimates.

On an annualized basis, the economy contracted 1.3 percent against a median forecast of a 2.6 percent annualized decline. That contrasted with U.S. annualized growth of 1.3 percent in the same quarter.

Companies restocked inventories more than expected after drawing them out in the preceding quarter, while public investment rose for the first time in six quarter thanks to post-quake reconstruction.

Private consumption, which makes up around 60 percent of the economy, eased 0.1 percent in April-June, a much smaller drop than expected due to one-off factors such as the switch to digital broadcasting leading to strong television sales.

But some analysts took tepid growth in corporate capital spending as a sign of companies' wariness about boosting investment due to the yen's rise, stagnating global demand and uncertainty over Japan's policy outlook.

Corporate capital spending rose 0.2 percent, less than the market forecast of a 0.5 percent increase.

External demand, or net exports, pushed down GDP by 0.8 percentage point, as the disaster prevented some Japanese manufacturers from shipping goods abroad.

Japan intervened in the currency market and eased monetary policy on August 4, aiming to curb a yen rise that threatened to derail recovery from the March 11 earthquake and tsunami, which killed about 20,000 and ravaged Japan's northeastern coast.

Analysts expect the economy to emerge from recession in July-September, after three straight quarters of contraction, but there is a growing uncertainty about global demand and the scope and timing of reconstruction spending at home.

(Additional reporting by Kaori Kaneko, writing by Leika Kihara and Tetsushi Kajimoto, editing by Tomasz Janowski)

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Cheap prices and Japan recovery lift world stocks (Reuters)

By Jeremy Gaunt, European Investment Correspondent Jeremy Gaunt, European Investment Correspondent – Mon Aug 15, 4:10 am ET

LONDON (Reuters) – World stocks climbed further out of their August hole on Monday, lifted by signs of earlier-than-expected recovery in Japan and a growing belief that shares may now be cheap.

European shares, however, failed to keep early gains and dropped into negative territory.

Gold and the Swiss franc, two of the main beneficiaries of recent global risk aversion, fell.

Investors were also weighing calls by Italian Economy Minister Giulio Tremonti for a more coordinated response to the euro zone debt crisis, including the creation of euro bonds, against an immediate rejection of the idea from Germany.

MSCI's all-country world stock index, a broad measure of global equity health, was up half a percent, ratcheting up roughly a six percent gain since hitting an 11-month low last Thursday.

"The markets have been technically very oversold and on that basis alone, they are due for a period of remission from the selling," said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin.

Bank of America-Merrill Lynch said a "buy" signal had been triggered last week as outflows out of risky assets hit significant levels.

"We note that since 2004, global equities have rallied an average 6.7 percent (in the four weeks that followed the trigger)," the bank's strategists wrote in a note.

Nonetheless, the pan-European FTSEurofirst 300 stocks index was slightly lower.

Shares in Asia were boosted by data showing Japan's economy shrank less than expected in April-June following a devastating earthquake and tsunami in March.

Japan's Nikkei closed up 1.37 percent.

SPILL OVER

The albeit tentative rise in confidence spilled into other assets.

The euro extended its gains against the Swiss franc to more than 3 percent after a Swiss newspaper report said the Swiss National Bank was poised to set a limit for the euro-Swiss franc exchange rate and will use all means to defend it.

The dollar also rallied against the franc, surging 2.7 percent to 0.79883.

Otherwise the U.S. currency was down around a quarter of a percent against a basket of major currencies.

On the euro zone crisis front, Tremonti's call for common euro zone debt issuance was rejected by German Finance Minister Wolfgang Schaeuble, who said such euro bonds would undermine the basis for the single currency by weakening fiscal discipline among member states.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Paris on Tuesday to discuss the crisis.

Core euro zone debt was mixed with yields rising on longer-term bonds.

(Additional reporting by Atul Prakash and Blaise Robinson; Editing by Toby Chopra)

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