TOKYO, Sept 30 - Japan's economic recovery took a step backwards in August as industrial production unexpectedly slipped, but optimists found reason for hope in forecasts for the following month and in employment and spending data. Industrial production fell 0.5 percent in August from July, against forecasts of a rise of one percent, as demand for semiconductor equipment slowed and cool summer weather hit production of items such as aluminium drink cans. Japan's economy has recently showed signs of coming out of a decade-old slump as exporters feed growing demand in major markets and big companies boost profits through restructuring.
Analysts said the retreat in August output may be a temporary hiccup and that the economy remained on a cautious recovery path. "The production figures for August weren't very good but part of that could be due to bad weather and is therefore temporary," said Tsuyoshi Nomaguchi, strategist at Daiwa Securities. "I don't think it's a big point for concern at this time." The government remained optimistic about output, forecasting it would rise 2.7 percent in September and 1.5 percent in October. An official at the Ministry of Economy, Trade and Industry described the August figure as "not a bad number". Other bright signs on Tuesday included a fall in the politically sensitive jobless rate in August to 5.1 percent, the lowest in two years, though the number of employed fell by 100,000. The lower jobless rate will be good news for Prime Minister Junchiro Koizumi, who is expected to call an election for November. Household spending in August rose by a real 2.2 percent in August from a year earlier, separate data showed. Finance Minister Sadakazu Tanigaki summarised the mixed outlook. "Sentiment seems to be improving, corporate results and capital spending are better," he said. "But we can't say yet that personal consumption is really strong." Japan's economy grew at an annualised rate of 3.9 percent in the April-June quarter, its fastest rate in over two years, but economists have said that pace is unlikely to be sustained. "I think it is improving modestly but it's not racing away from us yet," said HSBC Securities Chief Economist Peter Morgan. Betraying concerns that a strong yen could derail Japan's tentative recovery, Japanese officials kept up a barrage of comments warning of action but they declined to confirm whether Japan had actually stepped into the market to stem its rise.
LOOKING AT THE POSITIVES
Traders were convinced the BOJ had acted, however. The dollar jumped by more than one percent against the yen on suspected dollar-buying intervention on the last day of Japan's fiscal half year, although it quickly shed its gains. "It is likely there was intervention to push down the yen for the half-year book-closing, as it affects companies' earnings reports," said a foreign bank trader. Japanese authorities worry that a strong yen could hurt Japan's export-led recovery and drag down stock prices, which are key to the health of the banking system. Stocks rose as the yen weakened and as investors focused on the positive aspects of Tuesday's data. The Nikkei share average rose 1.51 percent to end the morning at 10,384.25. The dollar hit three-year lows against the yen of around 110.65 yen before rebounding on what currency traders said looked like yen-selling intervention by Japan. On Monday the president of Toyota Motor Co, one of Japan's largest exporters and the country's most profitable company, said a prolonged rise in the yen would seriously affect earnings. "Currency movements are supposed to mirror economic fundamentals. But the recent movements are not doing that, and the yen's rise has gone too far," Fujio Cho told reporters.
Worried about the fallout of a higher yen, the Japanese authorities conducted a record nine trillion yen ($81 billion) of currency intervention in the first seven months of the year alone, keeping the dollar above 115 yen until earlier this month. Without official action, traders said the yen was poised to test new highs -- perhaps on Wednesday, when the Bank of Japan will release its quarterly "tankan" survey of business sentiment. That is likely to show that large companies felt more optimistic about business prospects in the latest quarter, while smaller companies -- the backbone of Japanese industry and more dependent on domestic demand -- will still feel pessimistic. But the survey is unlikely to have factored in the recent rise in the yen and may therefore give an unduly bullish reading.//