Japan Factory Output Rises to Record, Inflation Gains
By Mayumi Otsuma and Lily Nonomiya
Sept. 29 (Bloomberg) -- Japan's industrial output rose to a record last month and inflation accelerated, giving the central bank room to raise interest rates by the end of the fiscal year in March.
An index of production climbed 1.9 percent from July, led by autos and electronics output, the trade ministry said in Tokyo today. Core consumer prices, which exclude fresh food, gained 0.3 percent from a year earlier, the statistics bureau said. Both results were in line with economists' expectations.
The reports back the Bank of Japan's commitment to raising borrowing costs as long as prices keep rising and the economy expands. The bank's Tankan survey of business sentiment on Oct. 2 is expected to show companies plan to increase investment at the fastest pace in 16 years.
``Today's numbers confirm the Bank of Japan's outlook, and we expect it to raise rates around February,'' said Takuji Aida, chief economist at Barclays Capital in Tokyo. ``If the Tankan shows business investment picks up momentum rapidly, the bank may push forward a rate increase to this year.''
The nation's jobless rate stayed at 4.1 percent in August, close to an eight-year low, the statistics bureau said. The jobs- to-applicants ratio, a key measure of demand for workers, slipped to 1.08 from a 14-year-high of 1.09, the labor ministry said. There have been more jobs than applicants every month this year.
Yields on Japan's five-year notes rose 2 basis points to 1.125 percent at 3:40 p.m. in Tokyo. Five-year yields fell to a six-month low of 1.05 percent on Sept. 26. The Nikkei 225 Stock Average rose 0.6 percent to 16,127.58.
Tankan Survey
Japan's economic expansion, now in its 55th month, will become the longest since World War II if it continues through November.
The central bank's Tankan survey may show confidence slipped to 20 points from 21, while the nation's largest companies plan to increase spending 11.8 percent this year, faster than the 11.6 percent forecast made in June, economists said.
Five of 14 economists surveyed by Bloomberg News between Sept. 11 and 20 said they expect the Bank of Japan to raise its benchmark lending rate before the year's end, with five more expecting an increase by March 31.
The yield on the March Euroyen futures contract has risen to 0.635 percent from 0.595 percent on Sept. 25, suggesting traders have increased their bets that the central bank will raise rates by the end of March.
The industrial production index climbed to 106.9, the highest ever, the trade ministry said. Shipments also surged to a record. Production fell a seasonally adjusted 0.9 percent in July.
Corolla Cars, Aquos TVs
Auto companies and chipmakers are increasing output as they count on both global and domestic demand to keep expanding. Toyota Motor Corp., the world's largest automaker by value, said this week it stepped up production of vehicles including its Corolla compact. Sharp Corp. in August started production at its Kameyama factory, the world's largest liquid-crystal display plant, to meet global demand for its Aquos LCD televisions.
``Both domestic and overseas demand is robust,'' said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Research and Consulting in Tokyo. ``Production is likely to keep up this expanding trend.''
Automobiles accounted for more than a fifth of export gains in August, the government said last week. Exports of vehicles to the U.S., where more than a fifth of Japan's products are shipped, climbed 49 percent for a year earlier, the fastest pace since January 1997. Toyota boosted domestic production at a record pace last month, the company said Sept. 25.
Price Revision
Speculation for an interest-rate increase this year waned after core consumer prices rose 0.2 percent in July, less than half the pace expected, as the government reshuffled the basket of goods it uses to calculate inflation.
Bank of Japan Governor Toshihiko Fukui and board member Atsushi Mizuno this month said the revised inflation report didn't alter the central bank's outlook on prices. The central bank remains committed to lifting borrowing costs gradually, they said, as long as the economy and prices continue expanding.
``If the economic outlook remains sound, we think the BOJ can continue with measured rate hikes, and if the outlook dims, the interval of the rate hike is likely to be protracted,'' said Takehiro Sato, an economist at Morgan Stanley in Tokyo.
Bank of Japan policy makers kept the key interbank overnight lending rate at 0.25 percent at a board meeting this month, after raising it for the first time in almost six years in July. Japan's key rate is the lowest among Group of Seven nations.
`Arrow in the Quiver'
Today's reports ``will be another arrow in the quiver for the Bank of Japan to raise rates,'' said Glenn Maguire, chief economist for Asia at Societe Generale SA in Hong Kong. The data ``should immediately placate any concerns that the Japanese economy slowed in the third quarter.'' Maguire forecasts an October rate increase.
Still, prices excluding food and energy, which haven't risen in eight years, continued falling last month, signaling recent gains in core consumer prices have been largely the result of rising oil costs. Prices excluding food and energy fell 0.4 percent from a year earlier, the statistics bureau said.
``August was the month when energy pressure peaked. We have already seen gasoline prices weaken,'' said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo, predicting that core prices may resume declining by the year's end. ``That's a very tough situation for the central bank -- it's only energy pushing up the consumer price index.''
Core prices in Tokyo, home to one in 10 Japanese and a harbinger of Japan's nationwide consumer prices, were unchanged in September from a year earlier. Tokyo prices excluding food and energy fell 0.3 percent this month.
Electronics Inventory `Risk'
Today's factory output report showed that production, shipments and inventories of electronic parts and devices all rose to a record in August. A slowdown in global growth may pose a risk for production in the coming months.
``A potential risk is inventory accumulation in electronics parts and devices in anticipation of Christmas sales,'' said Morgan Stanley's Sato. ``This may result in unplanned inventory accumulation due to lower foreign demand.''
Japanese manufacturers cut output in 2004 when global demand for electronics and chips slowed, causing the economy to contract in the fourth quarter and almost pushing it into recession.
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