Nikkei gains as factory output rise beats hopes

Japan's producers stay cautious, with prediction of flat output in May and fall of 1.5pc in June

PUBLISHED : Friday, 31 May, 2013, 11:10am
UPDATED : Saturday, 01 June, 2013, 3:40am

Japanese factories churned out a better-than-expected performance in April, but the upbeat data yesterday was tempered as the country remained mired in deflation.

Economists were keeping a close eye on a string of data released yesterday morning, including factory output, unemployment, inflation and household spending figures, for clues as to whether a plan by Prime Minister Shinzo Abe and his hand-picked team at the Bank of Japan was taking hold.

Dubbed "Abenomics", the policy of big government spending and aggressive central bank easing to stoke the world's third-largest economy has helped push the yen into a steep decline, which benefits Japan's exporters.

Investors have cheered the moves, sending the Nikkei-225 Index soaring since December as the index skyrocketed nearly 60 per cent at one stage before jaw-dropping volatility in the past week saw a 7.3 per cent one-day tumble and another decline of more than 5 per cent on Thursday.

The index bounced back yesterday, closing 1.37 per cent up, as markets reacted to a weakening yen and economy ministry figures which showed factory output rose 1.7 per cent in April compared to March.

The rise, the fifth consecutive monthly increase, was evidence that industrial production shows signs of picking up at a moderate pace, the ministry said.

Separate figures showed Japan's jobless rate was flat, at a multi-year low of 4.1 per cent in April.

The data comes after Japan said in May that its economy grew again in the quarter to March, confirming its exit from recession.

On Wednesday, the Organisation for Economic Co-operation and Development slashed its growth forecast for the world's most advanced economies, except Japan, in an apparent nod to the country's prospects.

Tokyo and the Bank of Japan have also raised their annual growth estimates while the International Monetary Fund was due to release its own outlook later yesterday.

But a survey of manufacturers yesterday showed Japanese producers were cautious, expecting May factory output to be flat before slipping 1.4 per cent in June.

Also yesterday, household spending came in lower than expected while Japan's consumer prices fell 0.4 per cent year-on-year in April, underscoring the tough task in reversing years of falling prices that have crimped private spending and business investment.

Japan's stubborn deflation is a key target of Abe's economy-boosting measures, with the Bank of Japan pledging to meet a 2 per cent inflation target within two years.

However, some observers - and even several members of the Bak of Japan's board - have cast doubt on the ambitious target.

"I don't think inflation will pick up by this autumn," Daisuke Karakama, market economist at Mizuho Corporate Bank, told Dow Jones Newswires.

"The question will be what the Bank of Japan is going to do this autumn and next spring. There aren't many cards left in their hands" after the bank unleashed huge monetary easing measures earlier this year, he said.

The central bank's moves - similar to the US Federal Reserve's massive bond-buying programme, known as quantitative easing - have helped weaken the yen with the Japanese unit trading around 101 against the dollar yesterday, about 25 per cent lower than late last year.

A weaker currency makes exporters more competitive overseas and inflates repatriated foreign income.