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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Japan manufacturing mood up but yen clouds outlook

TOKYO (Reuters) – Japanese manufacturing confidence improved for a fifth straight month in September but the pace of recovery slowed to a crawl, with a strong yen and faltering global growth starting to take a toll on the world's No.3 economy, a Reuters poll showed.

Prime Minister Yoshihiko Noda, addressing parliament on Thursday, highlighted the threat posed by the buoyant yen to Japan's recovery from the March earthquake and repeated his pledge to work with the central bank to limit the damage.

The monthly Reuters survey, closely correlated with the Bank of Japan's quarterly tankan corporate poll, showed the manufacturing sentiment index rose slightly while the non-manufacturers' gauge fell for the first time in three months.

The poll of 400 big firms, of which 257 responded, also cast doubt on the prospects for further recovery from a recession triggered by the March 11 earthquake and tsunami. The survey's main sentiment gauge is seen rising further by December, but falling short of pre-quake levels.

The next BOJ survey due on October 3 is expected to paint a similar picture -- moderate improvement in sentiment and doubts about the future -- keeping the central bank under pressure to ease policy again to prop up the economy and tame the yen.

Noda has repeatedly warned of a threat of "hollowing out" of the Japanese industry because the yen's strength was eroding exporters' profits and boosting their domestic costs. As finance minister in the cabinet of his predecessor Naoto Kan, he oversaw three interventions in foreign exchange markets over the past year, the last one a record 4.5 trillion yen-selling operation on Aug 4.

Despite government efforts, the Japanese currency has continued to trade near its all-time highs hit in mid-August, boosted in large part by investors seeking safe havens from global markets which are being roiled by Europe's growing debt crisis and the weak U.S. economy.

As if to underscore Noda's concerns, Elpida Memory Inc (6665.T), the world's No.3 maker of dynamic random-access memory, said on Thursday it was considering moving some production to Taiwan to cope with the yen's rise.

"The anxiety about the future is likely to heighten through jitters in financial markets," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

"That, together with expectations about a prolonged deflation and low economic growth, keeps up pressure on the BOJ to do more."

The Reuters Tankan survey's manufacturing sentiment index, derived by subtracting the percentage of pessimistic responses from optimistic ones, rose just 2 points in September to plus 8, the smallest gain since the index plunged in April after the March disaster.

Confidence weakened in sectors including chemicals, steel and exporters of cars and electronics, according to the survey taken from August 26 to September 12.

The index is seen improving further to plus 13 in December, though still below levels seen just before the magnitude 9.0 earthquake and deadly tsunami devastated the northeast coast and triggered a radiation crisis at the Fukushima Daiichi nuclear plant.

A separate Reuters poll taken alongside the tankan survey showed about two-thirds of manufacturers were hurt by the strong yen and trying to cope with it by shifting operations overseas.

The Reuters survey underlined concerns recently voiced by a BOJ policymaker and Standard & Poor's.

BOJ board member Ryuzo Miyao said the economy may get less support than expected from overseas due to Europe's debt crisis and U.S. slowdown, while S&P cut its economic outlook, blaming in part slow government response to the March disaster.

Companies polled by Reuters said weakening U.S. and European demand were also a source of concern in addition to the yen's strength.

"The effects of the earthquake and stagnation in Europe and U.S. economies have cast a shadow over the electronics sector," an electric machinery maker said.

Japan's economy shrank in April-June at a faster pace than initially reported as companies held back on capital expenditure in the face of growing global uncertainty. Analysts polled by Reuters forecast a strong rebound this quarter, largely due to post-quake rebuilding, but trimmed their fourth-quarter growth estimates.

(Additional reporting by Kaori Kaneko; Editing by Tomasz Janowski)

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Japan manufacturing mood up but yen clouds outlook (Reuters)

TOKYO (Reuters) – Japanese manufacturing confidence improved for a fifth straight month in September but the pace of recovery slowed to a crawl, with a strong yen and faltering global growth starting to take a toll on the world's No.3 economy, a Reuters poll showed.

Prime Minister Yoshihiko Noda, addressing parliament on Thursday, highlighted the threat posed by the buoyant yen to Japan's recovery from the March earthquake and repeated his pledge to work with the central bank to limit the damage.

The monthly Reuters survey, closely correlated with the Bank of Japan's quarterly tankan corporate poll, showed the manufacturing sentiment index rose slightly while the non-manufacturers' gauge fell for the first time in three months.

The poll of 400 big firms, of which 257 responded, also cast doubt on the prospects for further recovery from a recession triggered by the March 11 earthquake and tsunami. The survey's main sentiment gauge is seen rising further by December, but falling short of pre-quake levels.

The next BOJ survey due on October 3 is expected to paint a similar picture -- moderate improvement in sentiment and doubts about the future -- keeping the central bank under pressure to ease policy again to prop up the economy and tame the yen.

Noda has repeatedly warned of a threat of "hollowing out" of the Japanese industry because the yen's strength was eroding exporters' profits and boosting their domestic costs. As finance minister in the cabinet of his predecessor Naoto Kan, he oversaw three interventions in foreign exchange markets over the past year, the last one a record 4.5 trillion yen-selling operation on Aug 4.

Despite government efforts, the Japanese currency has continued to trade near its all-time highs hit in mid-August, boosted in large part by investors seeking safe havens from global markets which are being roiled by Europe's growing debt crisis and the weak U.S. economy.

As if to underscore Noda's concerns, Elpida Memory Inc (6665.T), the world's No.3 maker of dynamic random-access memory, said on Thursday it was considering moving some production to Taiwan to cope with the yen's rise.

"The anxiety about the future is likely to heighten through jitters in financial markets," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

"That, together with expectations about a prolonged deflation and low economic growth, keeps up pressure on the BOJ to do more."

The Reuters Tankan survey's manufacturing sentiment index, derived by subtracting the percentage of pessimistic responses from optimistic ones, rose just 2 points in September to plus 8, the smallest gain since the index plunged in April after the March disaster.

Confidence weakened in sectors including chemicals, steel and exporters of cars and electronics, according to the survey taken from August 26 to September 12.

The index is seen improving further to plus 13 in December, though still below levels seen just before the magnitude 9.0 earthquake and deadly tsunami devastated the northeast coast and triggered a radiation crisis at the Fukushima Daiichi nuclear plant.

A separate Reuters poll taken alongside the tankan survey showed about two-thirds of manufacturers were hurt by the strong yen and trying to cope with it by shifting operations overseas.

The Reuters survey underlined concerns recently voiced by a BOJ policymaker and Standard & Poor's.

BOJ board member Ryuzo Miyao said the economy may get less support than expected from overseas due to Europe's debt crisis and U.S. slowdown, while S&P cut its economic outlook, blaming in part slow government response to the March disaster.

Companies polled by Reuters said weakening U.S. and European demand were also a source of concern in addition to the yen's strength.

"The effects of the earthquake and stagnation in Europe and U.S. economies have cast a shadow over the electronics sector," an electric machinery maker said.

Japan's economy shrank in April-June at a faster pace than initially reported as companies held back on capital expenditure in the face of growing global uncertainty. Analysts polled by Reuters forecast a strong rebound this quarter, largely due to post-quake rebuilding, but trimmed their fourth-quarter growth estimates.

(Additional reporting by Kaori Kaneko; Editing by Tomasz Janowski)

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Japan big manufacturers' mood improves, outlook dims (Reuters)

TOKYO (Reuters) – Big Japanese manufacturers turned optimistic in the third quarter as output recovered swiftly after the March 11 earthquake and tsunami, but scaled back forecasts for the months ahead due to the yen's strength and a looming global slowdown, a Ministry of Finance survey showed.

The survey comes ahead of the Bank of Japan's quarterly tankan poll due on October 3, one of the central bank's key guides in steering monetary policy.

"Three months ago, companies were overly pessimistic but that pessimism has receded thanks to a quick recovery in supply chains disrupted by the March earthquake," said Junko Nishioka, chief economist at RBS Securities in Tokyo.

"But the downward revision in large manufacturers' forecast for October-December and a further slowdown expected for the following quarter are clear evidence of the blow from the yen's having appreciated beyond their assumptions.

"This suggests companies will be similarly cautious about the outlook in the Bank of Japan's tankan survey due next month, keeping pressure on the BOJ to keep an easy policy," Nishioka said.

The index of sentiment at large manufacturers improved to plus 10.3 in July-September from minus 23.3 in April-June, the joint survey by the Ministry of Finance and the Economic and Social Research Institute showed on Monday.

Companies also notched up their capital spending forecasts for the fiscal year to March 2012 to a 5.4 percent increase from a 4.9 percent rise seen in the previous quarterly survey.

In another sign of improving business conditions, Japanese wholesale prices that reflect input costs rose 2.6 percent in the year to August, below the median forecast for a 2.7 percent rise and down from July.

However, forecasts for the joint finance ministry survey's sentiment index in the fourth quarter were scaled back to plus 13.6 from 17.4 in the last survey.

The March quake and tsunami, which wiped out whole communities along Japan's northeastern coast and killed 20,000, knocked the world's third biggest economy into its second recession in three years.

Economists expect the economy to resume growing this quarter after three consecutive quarters of contraction, but the outlook further ahead appears increasingly dim due to the strong yen and faltering global economic growth.

The BOJ eased monetary policy at its rate review on August 4 because board members wanted to show the bank's determination to head off various risks that lay ahead for the economy, minutes of the meeting showed.

The central bank held off on loosening policy further at a subsequent meeting in September, saving its scant ammunition for later with the yen having stabilised after spiking to a record high against the dollar on August 19.

A Group of Seven meeting over the weekend offered little in terms of coordinated action that could help to sustain economic growth while much of the developed world grapples with excessive government debt amassed during the 2008-2009 financial crisis.

Japan's business sentiment index measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.

(Additional reporting by Leika Kihara; Writing by Tomasz Janowski; Editing by Joseph Radford and Edmund Klamann)

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Japan big manufacturers' mood improves, outlook dims

TOKYO (Reuters) – Big Japanese manufacturers turned optimistic in the third quarter as output recovered swiftly after the March 11 earthquake and tsunami, but scaled back forecasts for the months ahead due to the yen's strength and a looming global slowdown, a Ministry of Finance survey showed.

The survey comes ahead of the Bank of Japan's quarterly tankan poll due on October 3, one of the central bank's key guides in steering monetary policy.

"Three months ago, companies were overly pessimistic but that pessimism has receded thanks to a quick recovery in supply chains disrupted by the March earthquake," said Junko Nishioka, chief economist at RBS Securities in Tokyo.

"But the downward revision in large manufacturers' forecast for October-December and a further slowdown expected for the following quarter are clear evidence of the blow from the yen's having appreciated beyond their assumptions.

"This suggests companies will be similarly cautious about the outlook in the Bank of Japan's tankan survey due next month, keeping pressure on the BOJ to keep an easy policy," Nishioka said.

The index of sentiment at large manufacturers improved to plus 10.3 in July-September from minus 23.3 in April-June, the joint survey by the Ministry of Finance and the Economic and Social Research Institute showed on Monday.

Companies also notched up their capital spending forecasts for the fiscal year to March 2012 to a 5.4 percent increase from a 4.9 percent rise seen in the previous quarterly survey.

In another sign of improving business conditions, Japanese wholesale prices that reflect input costs rose 2.6 percent in the year to August, below the median forecast for a 2.7 percent rise and down from July.

However, forecasts for the joint finance ministry survey's sentiment index in the fourth quarter were scaled back to plus 13.6 from 17.4 in the last survey.

The March quake and tsunami, which wiped out whole communities along Japan's northeastern coast and killed 20,000, knocked the world's third biggest economy into its second recession in three years.

Economists expect the economy to resume growing this quarter after three consecutive quarters of contraction, but the outlook further ahead appears increasingly dim due to the strong yen and faltering global economic growth.

The BOJ eased monetary policy at its rate review on August 4 because board members wanted to show the bank's determination to head off various risks that lay ahead for the economy, minutes of the meeting showed.

The central bank held off on loosening policy further at a subsequent meeting in September, saving its scant ammunition for later with the yen having stabilised after spiking to a record high against the dollar on August 19.

A Group of Seven meeting over the weekend offered little in terms of coordinated action that could help to sustain economic growth while much of the developed world grapples with excessive government debt amassed during the 2008-2009 financial crisis.

Japan's business sentiment index measures the percentage of firms that expect the business environment to improve from the previous quarter minus the percentage that expect it to worsen.

(Additional reporting by Leika Kihara; Writing by Tomasz Janowski; Editing by Joseph Radford and Edmund Klamann)

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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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