TOKYO, Oct 29 - Japan's industrial production surged above expectations in September, helped by strong demand for Japanese goods in Asia and the United States, in the latest indication the country's economic recovery is on track. Industrial output rose 3.0 percent in September from a month earlier on a seasonally adjusted basis, the biggest gain since May 2002, according to preliminary figures from the Ministry of Economy, Trade and Industry (METI). That beat a median forecast for a 1.5 percent rise in a poll of 25 economists last week. "It's likely that improving exports are the biggest factor behind the figure," said Mamoru Yamazaki, chief economist at Barclays Capital Japan. "Manufacturing is strong and is pulling things along while non-manufacturing stays weak, but overall the gradual recovery is continuing," Yamazaki said. Exports have been the main engine behind Japan's recovery while domestic conditions remain slow. Exports surged 9.2 percent in September compared with a year earlier as Chinese demand for Japanese electronics, cars and other goods rose to record levels. Signs are good in the United States too. Reports on Tuesday showed consumers grew more confident in October and factories received more orders for durable goods.
"We started seeing a sharp pick-up in demand for mobile phone parts from the July-September quarter and we expect solid demand will continue toward the Christmas season," Yasuo Nishiguchi, president of electronic components maker Kyocera said on Tuesday. But the yen's rise to three-year highs of 108.09 to the dollar early on Wednesday heightened concerns about exports. A strong yen cuts into the profits of Japan's exporters when they convert overseas earnings back into yen and also makes their products expensive compared to those of competitors. And the brighter the outlook for Japan's economy, the more likely the yen is to rise. "Since overseas economies have been doing pretty well, I think we can expect strong figures looking into the fourth quarter," said Takashi Yamanaka, economist at UFJ Bank. "On market impact, this figure should work for a stronger yen and higher stocks."
SHARES RISE
The Nikkei share average <.N225> was up almost two percent in early trade as the strong figures helped support shares of tech firms such as Fujitsu Ltd <6702.T> and Hitachi Ltd <6501.T>. Japanese government bond prices fell back on the data and the rise in stocks, with the yield on the benchmark 254th 10-year cash bond <0#JPTSY=JBTC> up four basis points at 1.445 percent. Industrial production rose 1.1 percent in July-September from the previous quarter, increasing for the first time in two quarters. The rise came despite a series of factory fires in September and an unusually cool summer followed by a hot start to autumn that disrupted seasonal sales patterns and pushed retail sales in September down 2.2 percent from a year earlier. One fire destroyed a tyre plant owned by Bridgestone Corp <5108.T>, cutting some 13 percent of its domestic output. Two others hit a Nippon Steel <5401.T> plant in central Japan that accounts for one-fifth of the company's total output, putting it temporarily out of action and disrupting supplies of steel sheet to auto makers such as Toyota Motor Corp <7203.T>. "Production must have been very strong because the numbers were higher than expected despite accidents at some factories in September," said Junichi Makino, senior economist at Daiwa Institute of Research. "Exports are growing and production is booming accordingly, in particular in the information-technology and auto sectors." METI raised its assessment of industrial output, saying it sees signs of recovery. In the previous month's report it had said it was on a flattening trend. "Demand for electronic goods and devices, automobiles and personal computers is looking up," Kazuaki Hasegawa, METI's current statistics division director, told a briefing. METI forecast manufacturers' output -- a key component and close proxy of industrial production -- would rise 2.8 percent in October and rise 2.5 percent in November. ($1=108.20 yen)//