JAPAN

Industrial output hits record low, unemployment at three-year high

Japan's industrial production plummeted at the fastest pace on record in December, setting the unemployment rate at a three-year high while consumer spending has slumped, according to Japanese government figures.

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REUTERS - Japanese industrial production fell a record 9.6 percent in December, while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.


Unemployment hit a three-year high, household spending dipped, and manufacturers saw no quick turnaround in the outlook for industry -- the main driver of the world's second-biggest economy -- as inventories hit record highs despite factory closures and lay-offs.

 

Subsiding inflation and worsening economic conditions are also stoking deflation worries, as in other major economies, which may prompt more central bank steps to support the staggering economy and free up frozen credit markets that are starving key companies of cash.

 

Economists said fourth-quarter GDP figures, due out in February, would show Japan's economy shrinking at a double-digit annual rate, and Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities, said early 2009 also looked bleak.

 

"As output adjustments continue, weakness in the overall economy will persist in January-March, and the degree of worsening depends much on how exports turn out," he said.

 

"It is already a consensus view that core consumer inflation will turn negative soon, but we must watch if a worsening of the economy pushes Japan into a deflationary spiral even though the Bank of Japan sees no signs of that happening right now."

 

Susumu Kato, chief economist at Calyon, said he expected a 9.6 percent annualised contraction in the fourth quarter, followed by a deeper slump in January-March.

 

Japan's industrial production fell a record 9.6 percent in December after an 8.5 percent drop in November, as companies have been forced to cut output as export demand for their cars, electronics and machinery evaporates.

 

"We haven't experienced such a sharp fall in the past," Economics Minister Kaoru Yosano said. "This drop is likely to continue."

 

Related fears for the health of the U.S. economy, and the effect on Japanese exports, drove the Nikkei share average down 3.4 percent, with a string of corporate profit warnings not helping.

 

Once again the yen's safe-haven reputation trumped the weak Japanese economic data, as it rose to around 89.5 per dollar.

 

INVENTORIES STILL RISING

 

Factories are now operating at their lowest level in 20 years but the data showed inventories rose for a fourth straight month -- suggesting there is no sign that production cuts have finished.

 

"The inventory ratio rose to a record high, showing output adjustments are still not catching up with the incredible speed of falls in shipments," said Junko Nishioka, chief economist for RBS Securities.

 

Factories forecast a further slide in production of 9.1 percent in January and another 4.7 percent fall in February.

Job conditions are worsening amid a slew of job cuts by companies that are slowing output at an unprecedented pace.

 

Japan's jobless rate rose to 4.4 percent in December while the availability of jobs sank to a five-year low.

 

DEFLATION AHEAD?

 

Annual core consumer inflation, meanwhile, slowed to 0.2 percent from 1.0 percent in November. Consumer inflation has been slowing since hitting a decade high of 2.4 percent in July and August as oil prices have retreated sharply from record highs.

 

Energy prices fell 6.8 percent in December from a year earlier, a government official said.

 

A rapid slowdown in annual consumer inflation has prompted fears of a return to deflation, which plagued Japan in the early 2000s as the country tackled its own financial crisis.

 

The Bank of Japan has forecast consumer prices will fall for two consecutive fiscal years to March 2011.

 

The BOJ is buying corporate debt to ease an increasingly severe funding squeeze, while it has kept interest rates on hold just above zero.

 

The U.S. Federal Reserve on Wednesday also kept its main interest rates unchanged, but signaled unease over deflation risks amid the weakening economy.

 

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