Japan industrial output falls on weaker exports

TOKYO, Oct 30 (Reuters) Japan's industrial output fell in September, as expected, and inventories in the information technology sector rose to a record high, underscoring concern that a U S slowdown could hurt Japan's economic recovery.

The decline in output from a month earlier could cool speculation that the BOJ will raise interest rates by the end of this year, a view already in doubt after soft consumer price data released on Friday.

Industrial production in September fell 0.7 percent from August, the Ministry of Economy, Trade and Industry (METI) said on Monday, against a market forecast for a 1.0 percent fall.

The decline, which followed a 1.8 percent rise in August, was largely due to declining automobile shipments to the United States and Europe, as well as weak output of semiconductor manufacturing equipment, the data showed.

Inventories of electronic parts and devices rose 7.3 percent in September from August, with the index hitting the highest level under the current calculation method, the ministry said.

''I'm a bit worried that inventories may be piling up a bit,'' said Yasuhiro Onakado, chief economist at Daiwa SB Investments.

''Inventories of electronic parts and devices rose, so that could mean they are boosting stockpiles not just for the Christmas season.

That needs to be closely monitored from now on,'' he said.

Markets showed little reaction to the data.

Industrial output rose 1.0 percent in July-September from the previous quarter, expanding for the fourth straight quarter.

But production may slow in the coming months if IT-sector inventories pile up further and U.S. consumers do not buy as many Japanese goods as hoped during the Christmas shopping season, analysts say.

Manufacturers' output -- the core component of production -- is expected to fall 0.2 percent in October but rise 0.5 percent in November, according to the ministry.

The METI maintained its view that industrial output is on a rising trend, with a ministry official telling reporters that September's output fall alone is not enough to say the trend in output has changed.

''Still, inventory levels are high so we need to keep a close eye on output ahead,'' the official said.

BOJ REPORT EYED The data comes ahead of a policy meeting by the Bank of Japan on Tuesday.

While market traders expect the central bank to keep interest rates on hold, they are closely watching its twice-yearly economic outlook report to be released after the meeting for clues on the timing of a next rise in interest rates.

One focus will be on how the BOJ's nine board members, in the outlook report for October, describe the potential risk of a U.S.

economic slowdown hurting Japanese exports and production.

Monday's data followed soft U.S. growth figures released on last Friday that showed U.S. gross domestic product rose an annualised 1.6 percent in July-September from the previous quarter, the slowest advance since the first quarter of 2003.

''It should be watched how the soft U.S. GDP data released last Friday may affect Japanese exports towards the end of this year,'' said Takeshi Minami, chief economist at Norinchukin Research Institute.

''If it becomes clearer that the slowdown of the U.S. economy has had a negative impact on Japan's exports, the Bank of Japan would face difficulty raising interest rates again this year.'' In July, the BOJ raised the key overnight call rate target to 0.25 percent from zero, its first rate rise in six years, on growing signs of Japan emerging from nearly a decade of price declines.

Most analysts expect the central bank to raise rates again by the end of the fiscal year next March, with some betting on a move by the end of December.

Japan's economy is expected to record its longest postwar growth period next month, albeit at a much slower pace than in previous economic booms.

The economy grew at an annualised 1.0 percent in April-June, much lower than the 3.3 percent growth of the previous quarter.

Reuters SAM DB1014