Japan's Industrial Output Falls for Second Month (Update1)

By Jason Clenfield


March 31 (Bloomberg) -- Japan's manufacturers cut production in February for a second month as the U.S., the country's biggest export market, verges on a recession.

Output fell 1.2 percent from January, when it slid 2 percent, the Trade Ministry said today in Tokyo. The median estimate of 32 economists surveyed by Bloomberg News was for a 2 percent drop.

The first back-to-back declines in production in nine months indicate companies are concerned world demand will slow as the U.S. economy grinds to a halt. Economic and Fiscal Policy Minister Hiroko Ota said last week the U.S. slowdown may start to take its toll on the emerging markets where Japan ships more than half its exports.

``Companies are becoming more and more cautious,'' Masamichi Adachi, an economist at JPMorgan Securities in Tokyo, said before the report was released. ``Everybody expects external demand to slow.''

The yen traded at 99.39 per dollar as of 9:03 a.m. in Tokyo from 99.24 before the report was published.

Companies surveyed said production will rise 2 percent in March before falling 1 percent in April, the report showed.

Reports last week showed a deepened housing slump is taking its toll on American consumers and that the economy's six-year expansion may be coming to an end. Japan's economy is also deteriorating, with inflation quickening to the fastest pace in a decade, unemployment rising and household spending stalling.

Tankan Survey

The Bank of Japan's quarterly Tankan survey of business confidence, due tomorrow, will probably show that sentiment among the country's biggest manufacturers fell in March to its lowest level in four years. The yen's rise and record oil prices are eroding profits, just as the U.S. slowdown is hurting sales.

Toyota Motor Corp., Japan's biggest carmaker, this month said the company may miss its 2008 sales target because the yen's gains make its cars more expensive overseas. The rising cost of steel is also making each sale less profitable, it said. The yen has risen 13 percent against the dollar this year.

Canon Inc., the nation's largest camera maker, forecast that belt-tightening among U.S. consumers will cause sales in the Americas to fall for the first time in nine years.

The risk of a slowdown and worsening sentiment among businesses and consumers has investors betting the Bank of Japan will cut interest rates this year. Traders see a 54 percent chance the central bank will lower the key rate from 0.5 percent by December, according to JPMorgan Chase & Co. calculations.

Still, demand from Asia and Europe has so far helped manufacturers weather the drop in U.S. sales.

`Still Holding Up'

``There's no question that there's a severe downturn in the U.S. economy, almost certainly a recession, but the rest of the world is still holding up,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Japanese export growth unexpectedly accelerated in February, thanks to higher demand from emerging markets, even as shipments to the U.S. fell for a sixth month.

Mitsubishi Motors Corp. said last month its overseas sales surged 41 percent in 2007, led by Russian demand. Japan's exports to Russia, where oil revenue is helping to expand the economy, have more than doubled in the past two years.

Demand from developing economies prompted Mitsubishi Motor, Toyota and Nissan Motor Co. to increase production in February, even as U.S. sales slow. Nissan, which forecasts sales to China will rise 11 percent to half a million cars this year, raised domestic output 28 percent from a year earlier.