Tokyo, March 31 (Bloomberg) -- Japan's industrial production fell more than expected in February and inventories dropped to the lowest in more than 14 years as Honda Motor Co. and other companies anticipated lower demand. Production fell a seasonally adjusted 1.7 percent from January, the fifth decline in six months, the Ministry of Economy, Trade and Industry said. The median forecast of 19 economists surveyed by Bloomberg News was for a decline of 0.8 percent. A 2.3 percent decline in inventories suggests companies are bracing for a drop in production because of weak demand at home and as exports are hurt by the Iraq war. A Bank of Japan business confidence survey tomorrow will probably show companies were pessimistic for a ninth quarter and plan to cut investment, economists surveyed by Bloomberg News said.
``We're not seeing too many signs that there are brighter times ahead for the economy,'' said Yukiaki Suzuki, a director at Hamamatsu Photonics KK. The maker of sensors for machines last week cut its profit forecast for the business year ending Sept. 30 by 43 percent. The Nikkei 225 Stock Average was down 2.5 percent to 8074.59 at 12:45 p.m. in Tokyo. Exporters such as Honda declined after U.S. economic reports showed consumer confidence and spending weakened amid concern about the war in Iraq. Japanese bonds rose, pushing 10-year yields to a record low on expectations that the drop in production would extend five years of falling consumer prices in the world's second-largest economy. The No. 247 bond, which carries a 0.8 percent coupon and matures in 2013, rose 0.321 to 100.837, according to Japan Bond Trading Co. as of 12:37 p.m. in Tokyo. Its yield fell 3.5 basis points to 0.710 percent, after touching 0.695 percent, a record low.
Iraq War
The drop in production was led by transportation and electronic machinery, today's report showed. Honda, Japan's second largest-automaker, said production in Japan fell 13 percent in February from a year earlier. Honda has been making more cars in Europe, the U.S. and China. A prolonged war in Iraq is expected to hurt global demand for Japanese exports, which accounted for half of the nation's 0.5 percent economic growth last quarter.
The economy of the U.S., Japan's biggest export market, is showing signs of slowing. Consumer confidence fell to the lowest since August 1993 in March, and personal spending was unchanged in February, the first time that spending failed to rise for two straight months since December 1990 to January 1991, government reports showed last week. ``Managers continue to be cautious about expanding production, given the uncertain outlook for Japan's economic growth,'' said Yasukazu Shimizu, a senior economist at Aozora Bank Ltd. Japanese companies are taking advantage of low costs for labor and raw materials in China following its entry into the World Trade Organization. Hoya Corp., the world's biggest supplier of glass plates used to make semiconductors, said this month that it would build a factory in Suzhou to make optical lenses and glass starting in April next year. The government predicts industrial production to rise 2.8 percent in March and gain 0.2 percent in April, today's report showed. From a year earlier, industrial production rose 4.2 percent. //www.quote.bloomberg.com