1st LD Writethru: Japan's industrial output drops for 1st time in 6 months in January

Japan's industrial production declined for the first time in six months in January with the output of transportation equipment dragging down overall production sectors in the recording period, the Ministry of Economy, Trade and Industry, said in a preliminary report on Tuesday.

According to the ministry, factory output dropped 0.8 percent in January from a month earlier, missing median market forecasts for a 0.4 percent rise, with the index of output at factories and mines standing at 99.8 against the base of 100 in 2010.

The ministry, however, despite the decline in January, maintained its basic assessment, stating that industrial production is shows signs of improving.

Looking ahead, the government said that industrial production is expected to rise 3.5 percent in February, although would retreat again in March by as much as 5 percent.

Production was dragged down in January by slumping output in sectors related to transport equipment, primarily, the ministry said, followed by chemicals, general-purpose, production and business oriented machinery.

The index of industrial shipments slid 0.4 percent to 98.5, and the index of inventories was flat at 107.5, the government's data showed.

In terms of sectors that contributed to a fall in shipments in the recording period, transport equipment again was the major division, followed by chemicals and non-ferrous metals, the ministry's data also showed.

As for inventories in the recording period, the ministry said that industries that mainly contributed to a decrease comprised general-purpose, production and business oriented machinery, electrical machinery, and information and communication electronics equipment.

The unexpected drop in industrial output could be attributed to the yen's appreciation against the U.S. dollar, market analysts proferred, as global markets remain circumspect about new economic policies under U.S. President Donald Trump.

In times of economic uncertainty, the yen is often used as a safe haven by investors which pushes its value up against a basket of other major currencies.

Japan, however, being an export-led economy, relies on a weak yen to boost the competitiveness of its products sold overseas and to ensure that profits made in global markets are augmented when repatriated to Japan on favorable exchange rates.

In terms of Japan's output in the near future, partly in related to currency, exports and policy issues, some economists voiced their concerns about the sustainability of Japan's economy.

"I worry about the negative forecast for March, which calls for a 5 percent drop. That just makes you worry about the sustainability of the economic recovery," said Masaki Kuwahara, senior economist at Nomura Securities Co.

"Sluggish exports, including of autos, weighed on production in January," Kuwahara said.

On Monday Japan's lower house of parliament approved a record draft budget for fiscal 2017 as the government grapples to finance rapidly swelling welfare costs to tackle the nation's demographic crisis and stagnant inflation.

The 97.45 trillion yen (870 billion U.S. dollars) budget will be enacted swiftly before the end of the current fiscal year on March 31 as Japan has been mired in deflationary pressure for decades, with various stimulus measures by the Bank of Japan and Prime Minister Shinzo Abe's numerous installments of his "Abenomics" aggressive economic polices, having negligible effects.

Growth areas remain slim in the world's third-largest economy and corporations who have managed to net profits are not increasing wages at a rate to encourage consumer spending, which accounts for 60 percent of Japan's GDP.

With public spending having gone awry for decades and Japan's fiscal health allowed to deteriorate with no clear signs of major new growth sectors to pull Japan out of its economic slump, or concrete solutions to tackle the shrinking and aging population, which is hollowing out both Japan's workforce and its consumers, the country's debt has swelled.

Public debt here stands at significantly more than double the size of Japan's economy and is the worst in the industrialized world.

With demand leading exports and exports leading output, analysts warned Monday that following the economy ministry's preliminary output data, there was little room for optimism.

"This is a reminder to be cautious for those who have been upbeat on Japan's economy," said Taro Saito, director of economic research at the NLI Research Institute. Endit