TOKYO, Aug 29 - Japanese industrial output rose more than expected in July and the number of people with jobs increased, but household spending and retail sales slid, suggesting a patchy recovery in the world's second-biggest economy. Production in Japan's factories, mills and refineries rose 0.5 percent in July compared with June on a seasonally adjusted basis, the government said on Friday. That beat a median forecast of a 0.2 percent gain in a survey of economists, and prompted the government to upgrade its view on industrial output for the first time in a year. "The economy is definitely recovering," said Peter Morgan, chief economist at HSBC Securities in Tokyo.
"We do have weak consumer spending numbers from the household survey. Cold weather has depressed numbers there," he said. "But the key point is that the U.S. economy is looking better and exports have turned up." The government forecast that manufacturers' output -- a key component and close proxy of industrial production -- would rise 2.0 percent in August and 1.5 percent in September. "Industrial production is on a flattening trend," the Ministry of Economy, Trade and Industry said in a statement, revising its previous view that it was "on a weak trend".
HIGH-TECH EXPANSION
The data showed the increase in output was led by a strong rise in electronics parts used in mobile phones and digital cameras, adding to expectations that the high-tech sector was swinging back into an expansionary phase. Canon Inc <7751.T> announced earlier this week that it plans to invest around 100 billion yen ($852.3 million) to win the top spot in the world market for chip-making devices. Other big-name electronics makers such as Sony Corp <6758.T> and Matsushita Electric Industrial Co <6752.T> have also said they are expanding production in areas such as flat panel TVs. "We will launch a major offensive (against rivals) towards the end of this year. We want to capture a 30 percent share in the Japanese flat-screen TV market by sales value," Sony Executive Vice President Tsutomu Niimura told a news conference on Thursday.
Recent data showing that the economy expanded for the sixth straight quarter in April-June, at an annualised rate of 2.3 percent, raised expectations that Japan will continue on a recovery path despite sluggish consumer spending. The news encouraged buying in both stocks and the yen and triggered a rise in 10-year government bond yields. The yen touched a six-week peak of 117.01 per dollar , while the stock market's key Nikkei average <.N225> rose 1.16 percent by the end of the day to close at 10,343.55. A recovery in industrial output and increasingly bullish investor sentiment is particularly good news for Prime Minister Junichiro Koizumi, who faces an election for leadership of the ruling party on September 20.
Most analysts expect him to win the party poll and secure a second term as the nation's leader, but weak data and falling share prices would add to pressure from within the party to soften his stance on reform in exchange for support. Other indicators also announced on Friday morning were more mixed, however, discouraging government officials and economists from declaring an all-clear on the economy.
PATCHY RECOVERY
Unemployment remained stuck at 5.3 percent in July, unchanged from a month earlier and still near a record high of 5.5 percent. But the number of employed, including self-employed, rose for the third straight month, by 70,000 to 63.81 million. The number of unemployed in July was down for the second straight month, falling 100,000 from the same month last year to 3.42 million. "The number of employed is rising so conditions seem to be improving, but the improvement is slow and the unemployment rate remains high," a government official told reporters. "Employment conditions remain harsh." Average spending by households of wage earners, a key gauge of consumption, fell a real 6.0 percent in July from a year earlier. Retail sales also fell in July, dropping 3.0 percent from a year earlier -- the 28th straight month of decline. The fall was likely to have been exacerbated by poor sales stemming from an unusually cool and wet summer, probably the worst in a decade.
While price data also showed the economy remained in deflation as the core nationwide consumer price index (CPI) fell for the 46th straight month, the decline appeared to be slowing. The 0.2 percent year-on-year fall in the core nationwide data was less than a median forecast of a 0.4 percent drop and was the smallest decline since May 2000. ((Reporting by Ritsuko Ando, editing by Michael Watson; +81-3 3432 8806)) ($1=117.32 Yen)//