Sept. 30 (Bloomberg) -- Japan's industrial production rebounded in August and household spending climbed for the first month in four, adding to signs that the world's second-largest economy will expand for a fourth quarter.

Production rose a seasonally adjusted 1.2 percent after dropping 1.2 percent in July, according to a report released by the Ministry of Trade and Industry in Tokyo today. Spending by households headed by a salaried worker rose 3.2 percent from July, seasonally adjusted, the statistics bureau said today.

Companies such as Kyocera Corp., the world's largest maker of ceramic chip packages, are cranking up production to meet rising demand for mobile phones and electronic gadgets. Increased output in Japan, whose economy accounts for half of Asia's total gross domestic product, is creating jobs, boosting wages and spurring consumer spending.

The reports ``show an economy that is starting to expand, driven both by the domestic side and by exports,'' said Richard Jerram, chief economist for Japan at Macquarie Securities Ltd.

The Nikkei 225 Stock Average fell 0.3 percent 13,574.30 at the close, after reaching its highest since May 2001 yesterday. The wider Topix index sank 1.1 percent. The 1.2 percent increase in industrial production was less than the 1.8 percent median forecast of 34 economists.

``I don't think you have to worry about the fact that some economic figures missed forecasts,'' said Youichi Yanai, who oversees the equivalent of $28 billion as chief fund manager at the Bank of Tokyo-Mitsubishi Ltd. ``The long-term trend is that growth remains intact and we're set for a sustained recovery.''

Matches U.S. Growth

Shares of some industrial companies climbed. Advantest Corp., the world's biggest maker of equipment used to test computer memory chips, added 5 percent. Tokyo Electron Ltd., the world's second-largest maker of semiconductor production equipment, advanced 2.7 percent.

Against the dollar, the yen rose to 113.23 from 113.30 before the industrial production report. Ten-year bonds were little changed after yields rose to their highest in more than a month yesterday.

Spending by companies to increase capacity helped Japan's economy expand at an annual pace of 3.3 percent in the second quarter. The U.S. economy grew at the same annual rate in the matching quarter, the Commerce Department said yesterday.

Unemployment fell to 4.3 percent from 4.4 percent in July, the bureau said in another report, matching the median forecast of 34 economists.

Deflation Ending

Core consumer prices, which exclude fresh food, fell 0.1 percent in August from a year earlier, the statistics bureau said today, the smallest drop since May, suggesting deflation may be ending. Prices sank 0.2 percent in June and July.

Central bank Governor Toshihiko Fukui yesterday said the bank may shift its policy of flooding the banking system with cash and keeping interest rates near zero before April if consumer prices have sustained gains by then.

Fukui's remarks were the first time a Bank of Japan official has indicated a specific timetable for changing the bank's policy. Toshikatsu Fukuma, Atsushi Mizuno and Miyako Suda, who are among the bank's nine policy makers, have all said in the past two weeks the central bank should consider a shift.

``The main question is when are they going to start to raise interest rates,'' said Macquarie Bank's Jerram.

The trade ministry forecast that industrial production would increase 3 percent in September from August and then decline 0.4 percent in October.

Momentum

``The recovery is firing on all pistons'' said Kirby Daley, vice president at Societe Generale Securities in Tokyo. ``Spending is going to be one of the key surprises that will have us upgrading our assessments.''

Household spending in August fell 1.3 percent from a year earlier, less than the median forecast for a 1.9 percent decline by 29 economists surveyed by Bloomberg. Seasonally adjusted spending increased 3.2 percent from July to 321,682 yen ($2,840).

``The large gain in spending month-on-month shows that consumption is in good shape, with unemployment on a declining trend and labor and wage conditions continuing to improve,'' said Takuji Aida, chief economist at Barclays Capital Japan Ltd. ``We can expect the economic recovery to gather momentum.''

Exports rose 9.1 percent in August from the same month a year earlier, the fastest pace of growth since November, government reports showed earlier this month. Exports of electronics equipment rose 5.3 percent.

``Sales are rising compared with the first quarter,'' Makoto Kawamura, president of Kyocera, said last month. Kyocera forecasts global handset shipments will rise as much as 10 percent from 600 million units in 2004.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

Last Updated: September 30, 2005 02:36 EDT