By Yasuhiko Seki and Shigeo Kodama

TOKYO (MNI) – Japan’s industrial production fell for the fifth
straight month in October and the unemployment rate ticked up again as
the economy languished on fiscal policy changes and the yen’s rise to
15-year highs against the dollar.

While stagnating output and challenging labor conditions mean the
Japanese economy may have to contract in the current quarter, economists
expect this slump will be temporary, thanks to red-hot emerging
economies leading global growth.

Production at the nation’s factories and mines fell a seasonally
adjusted 1.8% last month from the previous month, bringing the
industrial output index down to 91.1, the lowest since December 2009,
data from the Ministry of Economy, Trade and Industry released on
Tuesday showed.

The October decline was the fifth straight monthly drop and the
largest in 20 months

But it was much smaller than the median forecast in a Market News
International survey for a 3.5% drop, and firms surveyed by the METI
predicted a 1.4% rebound in November and a further 1.5% gain in
December.

As output fell, Japan’s unemployment rate rose to 5.1% in October
from 5.0% in September, marking the first rise in four months, data from
the Ministry of Internal Affairs and Communications showed on Tuesday.

But looking at the longer-term trend, the number of employed people
rose by 150,000 to 62.86 million in October, marking the second
consecutive year-on-year rise while the that of jobless workers fell
100,000 to 3.34 million, marking the fifth consecutive y/y drop.

In addition, the total nominal average monthly cash earnings per
regular employee in Japan rose a preliminary 0.6% year on year to
Y268,951 in October, posting the eighth straight y/y gain, data from
the Ministry of Health, Labor and Welfare released on Tuesday showed.

The “base wage” — the key indicator for a recovery — rose 0.1%,
showing the first y/y gain in 30 months.

“We judge that the possibility that the economy is bottoming out of
the latest downtrend is higher now,” said Taro Saito, senior economist
at NLI Research Institute, a unit of Japan’s largest life insurer Nippon
Mutual Life Insurance.

“With automakers, which had dragged at the overall output in recent
months, now seem to be ready to come of the misery, Japan can avoid a
most strictly-defined recession,” he said, referring to the second
straight quarter of a contraction in gross domestic product.

In October, output of transportation equipment — mostly
automobiles — fell 10.0% from the previous month, as such makers as
Toyota and Honda slashed their production, after the government in
September ended its subsidy for buying low emission vehicles.

New vehicle sales in Japan fell 26.7% from a year earlier to
193,258 units in October, the second consecutive y/y fall after -4.1% in
September, which was the first y/y drop in 14 months, the latest data
from the Japan Automobile Dealers Association showed.

But the transportation equipment sector now plans to hike overall
output by 3.7% in November and by an additional 5.6% in December,
according to METI, as automobile inventories dropped despite the cooling
of domestic demand following the end of subsidies.

Inventory in the transportation equipment fell 10.8% in October
from the previous month, a fourth decline in the past five months,
creating some room for future increase in output.

“The outlook for auto production confirms that declines in auto
production, caused by the end of the subsidy program, are temporary,”
said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset
Management.

Saito also said automobile output, which has weighed on industrial
production “can hit a bottom by the end of the year,” projecting that
quarter-on-quarter growth in January-March industrial output will be
slightly above 2%.

The general machinery sector — one of the most sensitive sectors
to changes in business cycles — also snapped a second-straight monthly
decline in output last month, thanks partly to a retreat of the yen and
solid demand in emerging markets.

Output of the general machinery sector rose 3.8% from September, as
production of semiconductor and flat-panel display manufacturing
equipment rose 22.9%.

“Capital investment in preliminary Q4 GDP (due out on Feb. 14) can
show growth, posting the fifth straight quarterly gain,” Takumori said.

Shipments of capital goods excluding transportation vehicles — a
coincident indicator for capex — showed a firm 3.4% gain in October,
posting the second straight month-on-month rise after +0.2% in
September.

Shipments of general machinery, another indicator for business
investment on equipment, also rose a solid 3.1% m/m last month, marking
the second consecutive monthly rise after +1.3% in September.

Both Bank of Japan policymakers and private-sector economists are
paying close attention to developments in industrial production when
checking the pulse of the economy as their peaks and bottoms have often
coincided with each other.

Economists also noted emerging signs of an improvement on the
export front.

The yen, which hit a 15-year high of 80.21 per dollar in early
November, has lost nearly 5% since then, sending the Nikkei 225 Stock
Average to the best level in five months.

Exports to China, the largest market for Japanese goods, expanded
17.5% to Y1.12 trillion in October, showing the 12th consecutive y/y
rise.

Chinese export growth picked up from +10.2% in September, but was
slower than +18.5% in August and +22.7% y/y in July after hitting a
recent peak of +80.0% in January 2010.

“As a whole, exports to Asia are likely to move out of the current
downturn as early as in the January-March quarter,” said Hirokata
Kusaba, senior economist at Mizuho Research Institute. “This will help
Japan avoid two consecutive quarters of a contraction.”

Japan’s real GDP grew at an annualized pace of 3.9% in the three
months ended in September, much faster than the consensus forecast in an
MNI survey for +2.5%, driven largely by buoyant spending on automobiles
ahead of the expiry of subsidies.

But economists on average expect the Q4 gross domestic product to
contract by an annualized 0.88%, the first drop since -1.5% in Q3 of
2009, due mainly to a plunge in consumption, according to the latest
monthly survey by the Cabinet Office’s Economic Planning Association.

While expressing some hope for the future, some economists warned
of the downside risks in the current quarter.

“With consumer spending set to drop after the end of subsidies for
greener cars and exports slowing right now, Japan is likely to post a
contraction of some 1.2% in the three month to December (at an
annualized pace),” NLI’s Saito said.

Japan’s average household spending fell a real 0.4% in October from
a year earlier to Y287,433, posting the first y/y drop in five months
after being unchanged in September, as positive effects of last-minute
spending on cars and cigarettes faded, data from the Ministry of
Internal Affairs and Communications showed today.

The October figure came in slightly higher than the median forecast
for -0.5% in an MNI survey of economists.

The government ended its subsidy program for buying
energy-efficient vehicles in early September but will continue to waive
taxes or apply lower tax rates for buying and owning low-emission cars
and trucks.

Meanwhile, it raised the tobacco tax on Oct. 1, causing last-minute
buying of cigarettes in September.

Some economists are still skeptical about the strength of exports
as a main driver for production.

Naoki Tsuchiyama, market economist at Mizuho Securities, said
export growth has slowed, which means there will be no quick turnaround
in domestic output.

The index of export volume fell a seasonally adjusted 2.5% on month
in October to 98.5 against 100 in the 2005 year, after peaking at 105.7
in July, Cabinet Office data showed.

The latest data from the Ministry of Finance also showed that
Japan’s trade surplus widened by a revised 2.6% in October from a year
earlier to Y821.26 billion, slowing notably from the 52.3% growth posted
in September.

Kazuto Uchida, chief economist at Bank of Tokyo Mitsubishi UFJ, is
also pessimistic about the near-term outlook.

“There is a wave of monetary tightening in emerging markets, led by
China, which will dampen their demand. In addition, since there is
little hope for a bounce-back in consumer spending, Japan is likely to
remain in a lull for the first half of next year,” he said.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4437 **

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