Japan production unexpectedly falls, outlook firm

TOKYO, May 30 (Reuters) Japan's industrial production unexpectedly fell in April from the previous month but was forecast to rebound in the months ahead, suggesting the corporate sector will keep supporting a steady economic recovery.

The data did little to change market expectations that the Bank of Japan will raise interest rates around August to keep on top of inflation.

Output fell 0.1 per cent in April from March for the second straight month of decrease, worse than a consensus forecast for a 0.5 per cent rise. Euroyen futures edged up as a result.

But manufacturers' upbeat output forecasts for the coming months eased worries over the economy's strength, resulting in Japanese government bonds slipping on chances of future rate hikes.

''The data is slightly weaker than expected. It is mainly due to continuing inventory adjustments in the electronics devices sector and slowing exports to the United States,'' said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute.

''As long as output grows in April-June, it would not delay any rate hike decision by the Bank of Japan,'' he said.

Manufacturers forecast that output will rise 1.8 per cent in May and rise 1.4 per cent in June, data from the Ministry of Economy, Trade and Industry showed today.

If the forecasts prove correct, industrial production is expected to rise 1.7 percent in April-June from the previous quarter, a ministry official told a briefing.

The December euroyen futures contract rose 1.5 basis points to 99.035 after the data, while June 10-year JGB futures hit a nine-month low of 133.04 before bouncing back to around 133.20.

The BOJ has kept monetary policy on hold since raising the key interest rate to a decade-high 0.50 per cent in February, which was the first rate hike since July last year.

Surprisingly strong figures on jobs and household spending released yesterday reinforced the view that the central bank could raise rates as early as in July-September.

HIGH-TECH INVENTORIES FALL The ministry stuck to its assessment of industrial output, saying it is on a moderately rising trend.

Output of small cars, electronic parts and steel goods fell, while that of chipmaking equipment, electric machinery and digital cameras rose, the data showed.

In a positive sign, inventories of electronics parts and devices fell 1.4 percent from the previous month, the first such decline in three months, partly on robust shipments of mobile phone parts to China.

Electronic parts makers expect output to rise 1.9 per cent in May and by 5.6 per cent in June, with some firms hoping the launch of new mobile phone models could boost demand for parts later this year, the official said.

Industrial output fell in the January-March quarter, although many economists saw that as a temporary adjustment after strong growth in the previous quarter.

Economists expect output to remain firm as Japanese exporters continue to benefit from strong growth in Asia and Europe, but some economists are concerned that a slowdown in the United States could dent US demand for goods and hurt Japanese growth.

Exports to the United States, Japan's largest export destination, fell 4.8 per cent in April from a year earlier, the first decline in over two years, Japanese trade data showed last week.

''From the Bank of Japan's perspective, the biggest downside risk remains US economic performance and the IT sector,'' said Naoki Iizuka, a senior economist at Mizuho Securities.

Japan is currently enjoying its longest period of expansion in the postwar era, albeit at a slower pace than during previous growth phases.

Economic growth slowed to an annualised 2.4 per cent in January-March from 5.0 per cent in the previous quarter partly due to a drop in capital spending.

Reuters SKB DB0937