TOKYO, Jan 29 - Japan's industrial output rose strongly in the final quarter of last year, spurred by demand for electronics goods, with a slight drop in December unlikely to knock the country's economic recovery off track. Output rose 3.6 percent in October-December over the previous three months, the Ministry of Economy, Trade and Industry (METI) said on Thursday, though it fell 1.0 percent in December from November, below a poll forecast of a 0.6 percent fall. "I thought it was a fairly neutral number in that we had the biggest surge in a generation in the past three months so that a modest decrease was to be expected," said Richard Jerram, chief economist at ING Securities. Strong demand for Japanese electronics and other goods in recovering world markets has helped lift the economy out of a 10-year slump, boosting production and spurring companies to increase investment in machinery. Electronics maker Canon Inc <7751.T>, for example, said this week it would spend 780 billion yen ($7.35 billion) between 2004 and 2006 to expand research and development, some 15 percent more per year on average than in 2003. Demand for Japanese exports is especially strong from China, which is sucking in capital and consumer goods to feed an economy that grew at some nine percent last year.
Component exports are also going to the many Japanese companies that have set up shop in China in recent years. The ministry said output of digital electronics goods such as cameras and DVD players was firm in the October-December quarter, while in December mobile phones and semiconductors stood out. "We don't have the impression that the foundation is less firm," a METI official told a briefing. "Most companies remain optimistic."
INVENTORIES BETTER
Other economists also focused on the 1.4 percent fall in inventories in December as a sign that conditions are improving. "The headline figure on output is slightly weaker than expected but it's not all bad news here because inventories are down 1.4 percent -- that's an improvement," said Yoshimasa Maruyama, economist at Mizuho Research Institute. Inventories at car makers for example fell 13.3 percent in December thanks to strong demand overseas. One cloud on the horizon, however, is the sharp rise of the yen, which makes Japanese goods more expensive on world markets and cuts profits at exporters. Japanese authorities have repeatedly sold yen in the currency markets in recent weeks to try and stem the yen's rise, but the yen remains close to 105 to the dollar, a level exporters have indicated could be painful if it continued. METI forecast that manufacturers' output -- a key component and close proxy of industrial production -- would fall 4.5 percent in February after rising 3.6 percent in January. The rise in January would likely be fuelled by new car and personal computer models, while February's decline would be a reaction to this and would in part also be due to maintenance at some manufacturers, the METI official said. Some economists noted that the February figure may not be as alarming as it seems. "The volatility in the January and February figures is likely from the timing of the Chinese new year, and that seasonal factor is not accounted for in the data," said Peter Morgan, chief economist at HSBC Securities. "Overall, growth is still strong based on an export-driven expansion." The ministry kept its assessment of industrial output unchanged, saying it was recovering but that the outlook for final demand was unclear. It will issue revised figures for December output on Friday, February 13. ($1=106.18 yen)//