Japan industrial output falls on weak export demand

Softening demand for exports led to the first decline in industrial production in the world's third-largest economy in three months.

Weaker than expected factory production in Japan has underscored the fragility of its economic recovery as growth throughout Asia slows.

Softening demand for exports led to the first decline in industrial production in the world's third-largest economy in three months, the government said on Friday, though it reported modest improvements in employment and consumer confidence.

The news cast a pall over share markets in Asia, already jittery over the pending release on Sunday of Chinese economic indicators. The Nikkei 225 index in Tokyo fell 0.3 per cent to 10,083.56.

The 1.2 per cent decline in industrial output in February was worse than expected and reflected lagging output in the transport equipment, electronics components and machinery industries. Production of cell phones, large passenger cars and liquid crystal devices also weakened, the government said.

"Whether this recent trend will be sustained will depend on the extent of the recovery in Asia," said Masayuki Kichikawa, an economist at Bank of America-Merrill Lynch. "The uncertainty over Chinese data is a very important factor."

The devastating tsunami in March last year - and a shift of manufacturing overseas to cut costs and reduce damage caused by the strong yen - plunged Japan's trade account into the red in 2011 for the first time since 1980.

Slowing growth in powerhouse China, the debt crisis in Europe and continued frailty in the US economy have further bit into demand for exports, which remains the strongest driver of growth for Japan.

Despite February's relatively weak number, output is forecast to rise 2.6 per cent in March and 0.7 per cent in April, as growth accelerates due to a pick up in rebuilding of northeastern regions devastated by last year's disasters.

Japan's economy shrank at an annual pace of 2.3 per cent in the fourth quarter, also hit by slowing public investment due to political bickering that delayed parliamentary approval for a 12 trillion yen ($156 billion) extra budget for tsunami reconstruction.

The economy contracted last year by 0.9 per cent from 2010, when GDP grew a robust 4.4 per cent. In 2009, the economy shrank 5.5 per cent.

In its latest economic assessment, however, the Organization of Economic Cooperation and Development forecast that Japan's growth would lead that of other major industrial economies in the first quarter, at 3.4 per cent.

In other data for February, Japan's consumer price index showed a stronger than expected increase in February of 0.3 per cent from the year before, to 99.8. It was up 0.2 per cent from January.

Forecasts had been for virtually no change in the index.

Rising costs for fuel and food were the main factors pushing prices higher, the Statistics Bureau reported.

Although rising crude oil prices threaten to further push production prices higher, slight gains in inflation are viewed as a positive for an economy that has been wrestling for years with deflation, or falling prices, which can be a drag on economic growth.

Meanwhile, unemployment fell in February, to 4.5 per cent from 4.6 per cent in January.

The Ministry of Health, Labor and Welfare reported that the ratio of job offers to job seekers rose to 0.75 in February, up from 0.73 in January. It was the highest figure since November 2008, the ministry said.

Consumer confidence also rose, reflected in a 3.5 per cent uptick in retail sales, the largest year-on-year gain since August 2010, the trade ministry reported Thursday.

Demand was also boosted by government subsidies for car purchases, which rose 21.4 per cent from a year earlier in February, after jumping 24 per cent in January.