RISE IN JAPAN INDUSTRIAL OUTPUT SLOWS

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Japanese industrial output rose for the fourth month in a row in June and is expected to keep climbing as manufacturers restart production lines halted during the country's sharpest post-war slump.

Preliminary data released by the Ministry of Economy, Trade and Industry on Thursday showed June industrial production was up 2.4 per cent month-on-month, a rate of increase lower than the revised 5.7 per cent growth recorded for May but broadly in line with economists' expectations.

The continued rise in output supports expectations that the worst of the current slump in the world's second-largest economy is now over, although it is still unclear how sustained or robust Japan's recovery is likely to prove. Despite the growth since February, industrial production in June was still down 23 per cent compared with the same month of 2008.

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The strength of end-demand for the goods produced in Japan in vital markets such as the US and Europe remains uncertain, with some economists and officials concerned about possible over-optimism regarding the “green shoots” of global recovery.

However, it is clear that Japan's manufacturers' drastic output cuts of the last quarter of 2008 and first quarter of this year were successful in clearing their decks of excess inventory despite the extraordinary speed at which demand declined.

Meti said on Thursday that inventories were down 1.0 per cent month-on-month in June, while the inventory ratio — which compares inventory to actual shipments and is seen as a leading indicator — was down 9.8 per cent.

Chiwoong Lee, economist at Goldman Sachs, said the sharp fall in the inventory ratio suggested the driver of current production growth had shifted from addressing excessive inventory reduction to responding to overseas and domestic demand that was being fuelled by government stimulus policies.

“Production should continue growing for a time given supports such as additional policies overseas, but there is still a risk of another inventory correction triggered by falling consumption amid deteriorating employment conditions,” Mr Lee wrote in a research note.

The sectors contributing most to the output revival in June were electronics manufacturers, steel and iron producers and chemical companies, Meti said. Manufacturers on average expected output to grow a further 1.6 per cent this month and 3.3 per cent in August, the ministry said.