Japan's Output Falls at Record Pace, Outlook Is Bleak

Japanese industrial production fell a record 9.6 percent in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.

AP

Other data showed rising unemployment, sliding household spending and no improvement in the outlook for Japan's industry -- the main driver of the world's second-biggest economy -- as inventories keep rising despite factory closures and lay-offs.

Subsiding inflation and worsening economic conditions are also stoking deflation worries, as in other major economies, that may prompt further central bank steps to support the staggering economy and free up frozen credit markets that are starving key companies of cash.

Economists said fourth-quarter GDP figures, due out in February, would show Japan's economy shrinking at a double-digit annual rate, and Tatsushi Shikano, senior economist, Mitsubishi UFJ Securities said early 2009 also looked bleak.

"As output adjustments continue, weakness in the overall economy will persist in January-March, and the degree of worsening much depends on how exports turn out," he said.

"It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral even though the Bank of Japan sees no signs of that happening right now."

The Nikkei 225 Average fell more than 3 percent, with exporter
shares hurt by fears that the U.S. economy will worsen.

Once again the yen's safe-haven reputation trumped the weak Japanese economic data, as it rose to around 89.75 per dollar.

Japan's industrial production fell a record 9.6 percent in December after an 8.5 percent drop in November, as companies have been forced to cut output as export demand for their cars, electronics and machinery evaporates.

Inventories Are Still Rising

Factories are now operating at their lowest level in 20 years but the data showed inventories were still rising -- suggesting there is no sign yet that production cuts have finished.

"The inventory ratio rose to a record high, showing output adjustments are still not catching up with the incredible speed of falls in shipments," said Junko Nishioka, chief economist for RBS Securities.

Factories forecast a further slide in production of 9.1 percent in January and another 4.7 percent fall in February.

"There is no sign of bottoming out. As industrial output posted a record drop, it is hard to expect a recovery anytime soon," said Daisuke Uno, a chief strategist at Sumitomo Mitsui Banking Corp.

"As the global economy has not yet been recovering, it is not realistic to discuss when the Japanese economy will bottom out. The Bank of Japan has been doing what it needs to do. The government can and should do more on fiscal spending."

Job conditions are worsening amid a slew of job cuts by companies that are slowing output at an unprecedented pace.

Japan's jobless rate rose to 4.4 percent in December while availability of jobs sank to a five-year low.
    
Deflation In Site?

Annual core consumer inflation, meanwhile, slowed to 0.2 percent from 1.0 percent in November. Consumer inflation has been slowing since hitting a decade high of 2.4 percent in July and August as oil prices have retreated sharply from record highs.

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Energy prices fell 6.8 percent in December from a year earlier, a government official said.

A rapid slowdown in annual consumer inflation has prompted fears of a return to deflation, which plagued Japan in the early 2000s as the country tackled its own financial crisis.

The Bank of Japan has forecast consumer prices will fall for two consecutive fiscal years to March 2011.

The BOJ is buying corporate debt to ease an increasingly severe funding squeeze, while it has kept interest rates on hold just above zero.

The U.S. Federal Reserve on Wednesday also kept its main interest rates unchanged, but signaled unease over deflation risks amid the weakening economy.

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