TOKYO (MNI) – Japanese industrial production logged the first
monthly rise in six months in November, while retail sales grew at a
faster than expected pace, suggesting that the economy may be nearly
through the worst phase of the recent downturn.

But labor and wage conditions showed signs of worsening, clouding
prospects for a sustained private sector-led recovery once the impact of
government stimulus measures are fully absorbed.

Production at the nation’s factories and mines rose a seasonally
adjusted 1.0% last month from the previous month, bringing the
industrial output index up to 91.8, according to data released today by
the Ministry of Economy, Trade and Industry (METI).

More importantly, METI’s survey of firms’ forecasts showed that
overall production is expected rise 3.4% m/m in December — revised up
from the 1.5% rise estimated in last month’s survey — and by a further
3.7% in January (first estimate).

“The latest upturn and a projected acceleration in growth pace now
suggest that Japan is almost through the worst phase of the latest
downturn,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ
Morgan Stanley Securities.

“Domestic demand for automobiles…is returning to a sustainable
pace (and) overseas demand also shows some signs of a bottoming out,” he

Automakers, which carry a heavy weighting in the index, are now
preparing to boost production thanks to brisk demand outside Japan. They
had cut back on output in the preceding months after the government
ended its purchase subsidy program in September.

In November, output of transportation equipment — mostly
automobiles – rose 4.4% from October following a 10.0% drop the previous

It was led by a 7.6% increase in production of small passenger cars
with engine displacements of over 660cc and less than 2000cc and a 5.9%
jump in the assembly of large passenger cars with engines of over

While industry leader Toyota Motor Corp continued to slash output
in November, smaller rivals such as Honda Motor Co and Nissan Motor Co
increased production to meet the recovery in overseas demand.

Japanese exports rose 9.1% in November from a year earlier to Y5.44
trillion, the 12th straight year-on-year rise, with the pace picking up
from a revised +7.8% in October, according to the recent data from the
Ministry of Finance.

Exports to China, the largest market for Japanese goods, expanded
18.3% to Y1.09 trillion in November, showing the 13th consecutive y/y
increase and picking up from +17.6% in October

“Producers’ bullish outlooks may reflect a better profile for
external demand from emerging Asia,” said Susumu Kato, chief economist
at Credit Agricole Corporate and Investment Bank.

The business environment is showing some signs of stabilization
while the household sector also signaled some resilience.

Japanese retail sales rose 1.3% in November from a year earlier,
posting the first year-on-year rise in two months, while the November
figure came in much stronger than the median forecast for a 0.2% gain,
according to an MNI survey of economist forecasts.

But Japanese financial markets showed little reaction to the upbeat

The Nikkei 225 Stock Average fell 0.4% this morning and the yield
on the benchmark 10-year JGB was little changed at 1.16%, far below the
seven-month high of 1.295% hit on Dec. 15 and 16.

“Given the gloomy outlook for the Japanese economy, we reckon the
yield is still too high,” said Hirokata Kusaba, senior economist at
Mizuho Research Institute.

“Taking into account challenging wage and labor market conditions,
spending on durable goods can’t stay afloat without tax incentives,” he

Total nominal average monthly cash earnings per regular employee in
Japan fell 0.2% year-on-year in November, the first fall in nine months,
and the nation’s unemployment rate stood at 5.1% in November, unchanged
from October, according to other data released today.

“The labor market, given its status as a lagging indicator, is
likely to deteriorate notably more, despite the confirmed improvement in
production activity,” said Taro Saito, senior economist at NLI Research

Other analysts also warned of the impact of lingering deflation.

Japan’s national core consumer prices fell 0.5% in November from a
year earlier, posting the 21st straight year-on-year drop.

“A slacking in supply and demand conditions remained intact and it
will take three more years before we can see a full improvement,” said
Takeshi Minami, chief economist at Norinchukin Research Institute.

“We can’t rule out of the possibility of additional monetary easing
by the Bank of Japan, depending on developments with deflationary
concerns,” he said.

The Bank of Japan left its policy guidance unchanged during this
month’s policy board meeting.

Norinchukin’s Minami forecasts the core consumer price index to
show declines of 0.9% in the current fiscal year ending in March 2011
and 0.5% in the following year.

“Given the risk of prolonged deflation and the possibility of
additional monetary easing, the yield on benchmark 10-year bonds may dip
toward 0.8% once again,” he said.
** Market News International Tokyo Newsroom: 81-3-5403-4835 **

[TOPICS: M$J$$$,M$A$$$,MAJDS$,MT$$$$]