TOKYO (AFP) — Japan on Thursday reported its first increase in factory output in six months, adding to hopes of an economic recovery that the central bank said should start to take root later this year.
The world’s second-largest economy entered a severe slump last year as consumers around the world stopped buying Japan’s cars, high-tech gadgets and other goods, but analysts say there are signs that it may be through the worst.
Factories boosted production by 1.6 percent in March compared with February, after a plunge of around one third since September.
Output is expected to rebound a further 4.3 percent in April and 6.1 percent in May, according to manufacturers’ forecasts.
“The dawn is breaking in the Japanese economy,” said Naoki Murakami, chief economist at Monex Securities. “Production has hit bottom.”
Investors welcomed the better-than-expected data, with Tokyo shares soaring almost 4.0 percent, helped by strong gains on Wall Street.
Japan’s economy suffered a brutal annual contraction of 12.1 percent in the last three months of 2008 and analysts say this year’s first quarter could be even worse.
The Bank of Japan predicted Thursday that the economy would shrink 3.1 percent in this fiscal year to March, more than previously expected.
But the pace of decline in exports and production would slow, paving the way for 1.2 percent growth in the next fiscal year to March 2011, the bank said as it left its key interest rate on hold at 0.1 percent, as expected.
“Economic conditions are likely to continue deteriorating in the coming months but gradually level out thereafter,” bank governor Masaaki Shirakawa told a press conference.
“The growth rate is expected, from the latter half of fiscal 2009, to recover at a moderate pace,” he said.
Recent export data have supported hopes that Japan’s slump may be easing, even if prospects for a full-fledged recovery appear dim while the global economy remains weak, given Japan’s heavy dependence on foreign markets.
Analysts note that Japan’s economy saw plenty of false dawns during its so-called “lost decade” of stagnation and deflation in the 1990s.
While production may have hit a bottom, “it is still uncertain if we can see a sustainable recovery from now on,” said Hiroshi Watanabe, an economist at the Daiwa Institute of Research.
“A full recovery in Japan requires strong exports, particularly to the United States. Unless we can see a recovery in the US economy, it is too early to say Japan’s economy is back on track,” he said.
Japan’s economic downturn was caused almost entirely by a slump in foreign markets.
As consumers overseas stopped buying Japanese products, companies slashed their production to reduce a glut of unsold products. Now some firms, such as automakers, are starting to gradually increase output again.
“Industrial output is set to surge in the second quarter of 2009 as the inventory adjustment process appears to be over,” predicted Macquarie Securities economist Richard Jerram.
An emerging economic recovery in China — Japan’s largest trading partner — as well as Tokyo’s fresh stimulus spending of about 150 billion dollars are expected to help arrest the economy’s decline.
But concerns are growing about domestic demand. Consumer spending was sluggish in Japan even before the recession and rising unemployment is expected to make people even more cautious about splurging.
Another worry is that companies are reducing their business investment, which has been another key driver of the economy.
“The Japanese economy is likely to see a division in 2009 that puts manufacturers in the ‘winners’ circle’ and households and non-manufacturers in the ‘losers’ camp,” said Barclays Capital economist Kyohei Morita.
“As a result, the economy is likely to show an ‘L-shaped’ recovery with business sentiment diverging by industry,” he added.
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