Japan's industrial output growth slowed sharply in May, raising questions over whether the nation can maintain the pace of its economic recovery and overshadowing a drop in the jobless rate to its lowest in nearly four years. Industrial output rose 0.5 percent in May from a month earlier, seasonally adjusted, compared with a 3.5 percent gain in April and a consensus forecast of a 2.5 percent rise, data from the Ministry of the Economy, Trade and Industry (METI) showed. The METI report showed that manufacturers were forecasting their output -- the core component of overall production -- to slip 0.1 percent June but grow 0.5 percent in July. "It looks like the momentum in production is fading after the steep rise that we had been seeing for some time," Takehiro Sato, economist at Morgan Stanley. Japan's economy grew an annualised 6.1 percent in the first three months of the year -- outstripping U.S. growth in the same period of 3.9 percent. Domestic demand was the main source of growth in that quarter on the surface, but economists say brisk exports that spurred output and capital spending were behind it. The weaker-than-expected May output figures dampened some of the optimism from a separate set of data showing an improving labour market that could eventually spur domestic spending and help the economy shift into a more balanced and sustainable recovery.
The Home Affairs Ministry said the jobless rate fell to 4.6 percent in May, its lowest since August 2000, from 4.7 percent in April. The rate has been trending lower from a record high of 5.5 percent set in January last year. The jobs-to-applicants ratio rose to 0.80 in May -- meaning there were 80 job openings for every 100 job-seekers -- from 0.77 in April, suggesting that more jobs were being generated. "The job data was very strong. This is the first time the jobless rate has been on a declining trend since the bursting of the economic bubble (in the early 1990s)," said Hiroshi Yokotani, economist at Tokio Marine Asset Management. UNCERTAIN OUTLOOK While Prime Minister Junichiro Koizumi would certainly be happy to see the jobless rate declining ahead of the July 11 Upper House elections, labour market data are generally considered lagging indicators by economists. Also, with corporations yet to loosen their grip on wages amid stubborn deflationary pressures, the message from household spending figures also released on Tuesday was mixed. Average spending by households of salaried workers in May was up a real 5.6 percent from the same month a year earlier but down 2.7 percent from April on a seasonally adjusted basis. Figures released on Monday showed retail sales in Japan in May slipped from the previous month. Private-sector consumption is the largest chunk of Japan's gross domestic product (GDP), accounting for about 55 percent, and its growth is crucial for the nation's economic recovery. Sato at Morgan Stanley said the weaker-than-expected May output figures appeared to be a result of small inventory adjustments and possibly the effect of a series of public holidays in early May on seasonal adjustment. The combination of weekends and national holidays prompted many workers and companies to stop work longer than the calendar would suggest. METI said that an underlying recovery in output was intact -- a view with which many economists agreed. "If you disregard the forecasts and look at the figures themselves, they are not necessarily bad. We still believe production is in an upward trend," said Kazuaki Hasegawa, a statistics officer at the METI. For now, financial markets were holding their breath for the Bank of Japan's "tankan" survey of business sentiment due to be released on Thursday. Economists said the quarterly survey would likely show corporate sentiment at its the best level since the bursting of the asset price bubble in the early 1990s.///