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Japan factory output rises but outlook weak

Reuters - Friday, August 29

By Tetsushi Kajimoto

TOKYO, Aug 29 - Japan's industrial output rebounded in July but economists said it was likely a blip and not enough to ease recession fears for the world's No.2 economy, with inflation rising and job offers at a four year low.

For the ninth month in a row, annual consumer inflation hit a decade-high in July due to high oil and food prices, depressing household spending.

Concerned about the effect on people and small companies of higher costs for energy and basic goods, the government is trying to finalise a $100 billion economic package on Friday, though most of that was likely to be non-cash items with only around $18 billion in spending. [ID:nT81766]

While the industrial output gain was a surprise, the view remained that the economy was in trouble so there was little market reaction.

"As far as July's data is concerned, the situation for industrial output doesn't look so bad, as it showed relatively firm shipments while the inventory ratio declined," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan.

"But for the outlook, while domestic demand is already weak, there is a strong possibility a slowdown in external demand will have a full impact later on. So we can't be optimistic."

Industrial output, which fell in both the first and second quarters of this year, rose 0.9 percent in July against a 0.5 percent drop expected by economists. [JPIP1=ECI]

Manufacturers' output, the core component of production, is expected to fall 2.9 percent in August but to rise 3.4 percent in September.

For more than half a century, two quarters of declining industrial output have signalled a recession in Japan.

Economists say production will probably fall for the third straight quarter in July-September due to slowing exports, which would be the longest such decline since 2001.

Japan's economy shrank in the second quarter as weaker U.S. and European export markets hit factories, and consumers tightened their belts to cope with high food and fuel costs.

Most Japan economy watchers, including government officials, see Japan either heading into a recession or already in one, but they do not expect a sharp downturn as seen in 1998 or 2001.

Japan measures a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.

INFLATION AT DECADE-HIGH

While annual core inflation rose to 2.4 percent in July, economists said it was unlikely to prompt the Bank of Japan to move interest rates from their low at 0.5 percent for a while as it eyes fall-out from a global slowdown.

For a graphic on Japanese inflation click https://customers.reuters.com/d/graphics/JP_CPI0808.gif

"At first glance, CPI's rise above 2 percent may be seen as a factor to prompt the BOJ to raise rates soon, but as it has been saying, the impact of high oil prices will come off in the future," said Junko Nishioka, economist at RBS Securities Japan.

"It's the downside risks to the economy that will make the BOJ hold its fire."

The rise in the core consumer price index, which excludes fresh fruit, vegetables and seafood but includes oil products, was slightly above a consensus market forecast for an increase of 2.3 percent. [JPCPI=ECI]

The pace of core consumer inflation has been accelerating in Japan due to hefty rises in commodities and energy but the central bank says it has yet to see this leading to broad-based price increases.

A hawkish member of the BOJ's policy board, Miyako Suda, warned on Thursday that the central bank should not relax its guard on inflation risks and it should raise interest rates once it is convinced economic problems have cleared. [ID:nT3667]

But even Suda said the time was not ripe yet for a rate hike as economic uncertainty remains at home and abroad.

The task of juggling inflation risks and the economic slowdown is less complicated with the BOJ than other major central banks, given Japan's still relatively tame inflation.

Japan's unemployment rate showed a surprising fall to 4 percent in July, but in a sign that hard times could still lie ahead, the ratio of jobs to applicants fell to its lowest in nearly four years and household spending also fell in July from a year earlier. [JPUNR=ECI] [JPALLS=ECI] (Additional reporting by Leika Kihara and Hideyuki Sano; Writing by Yoko Nishikawa)

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