May 25 (Bloomberg) -- Murata Manufacturing Co., a Japanese maker of parts for mobile phones and other electronics, will return to profit next business year by tapping demand in China and cutting costs, President Tsuneo Murata said.

“We can establish a structure that will allow us to make a profit without having a significant increase in sales,” Murata, 57, said last week in an interview at the company’s headquarters in Kyoto. The company this year forecasts its first annual loss since 1975.

Murata said he is expecting to benefit from expansion in China’s mobile phone market, as consumers buy third-generation handsets in the wake of the government’s $586 billion stimulus package. Factories in Japan that make the components are seeing a recovery in demand, he said.

Murata expects to post a net loss of about 2 billion yen ($21 million) in the year started April 1. It had 3.59 billion yen in net income in the year just ended, down 95 percent from the previous year. Operating loss this year is expected to narrow to 8 billion yen from 16.3 billion yen.

Murata, whose factories were operating at half capacity at the start of the year, said it planned to fire 2,000 seasonal workers in Japan and another 500 abroad in the year ended March. A factory in Sendai, northern Japan, operated by its subsidiary has been shut since April.

Orders from makers of handsets and other electronics, which fell by half in the four months ended February compared with a year earlier, have since recovered to 70 percent of year-earlier levels, Murata said.

“Manufacturers have reduced their inventories, and stockpiles are nearly in line with demand,” he said.

‘More Serious’

Unlike the recession that followed the bursting of the information technology bubble a decade earlier, achieving a prompt recovery in sales will be difficult in the current recession, Murata said.

“Following the IT bubble, inventories dramatically increased, but demand did not significantly fall,” he said. “The damage inflicted this time is more serious and widespread because consumer sentiment is different and the roots of the problem go a lot deeper.”

Murata shares rose 0.5 percent to 3,820 yen as of 3:10 p.m. on the Osaka Securities Exchange. The stock has gained 9.5 percent this year, outpacing a 2.8 percent advance in the benchmark Topix index.

Demand in the U.S. and Europe continues to be weak, and “may recover at a slow pace from the latter half of the year,” said Murata.

Murata said he expects the prices of electronic parts to fall by 10 percent to 12 percent this fiscal year, similar to previous years.

“Last year, price cuts were led by South Korean companies because of the weaker won,” he said. “The currency now isn’t as weak against the yen as it had been, so the reduction in prices may be smaller.”

To contact the reporter on this story: Masatsugu Horie in Osaka at mhorie3@bloomberg.net

Last Updated: May 25, 2009 03:00 EDT