Aug. 31 (Bloomberg) -- Japan's industrial production fell twice as much as economists expected in July, adding to evidence that growth may slow in the world's second-largest economy.

Production fell a seasonally adjusted 1.1 percent from June, when it rose 1.6 percent, the trade ministry said in a report in Tokyo today. The median forecast in a Bloomberg survey of 37 economists was for a 0.5 percent drop. The decline was led by makers of electronic parts and transportation equipment.

Manufacturers including Pentax Corp. are cutting inventories as export orders fall and record oil prices threaten to slow global economic growth. Declines in retail sales and household spending, reported yesterday, suggest Prime Minister Junichiro Koizumi won't be able to rely on domestic demand to prevent a slowdown. He faces elections on Sept. 11.

``Today's report adds to evidence that economic growth is coming to a standstill,'' said Yasukazu Shimizu, an economist at Mizuho Securities, who correctly predicted the drop. ``Rising crude oil prices may hurt demand in the U.S. and China,'' Japan's largest export markets.

Japanese government bonds gained, causing 10-year yields to fall 3 basis points to 1.335 percent, the lowest in more than four weeks. The Nikkei 225 Stock Average declined 39.54, or 0.3 percent, to 12,413.60 at the 3 p.m. close in Tokyo.

The report ``raised concern the economic recovery is losing momentum,'' said Shinji Hiramatsu, who helps oversee the equivalent of $6.4 billion at Sompo Japan Asset Management Co. in Tokyo. ``Rising crude oil prices may hurt U.S. consumer spending, and it will be a negative for Japan's economy.''

Excess Inventories

Production has fallen for four of the past six months as manufactures of electronics parts and devices scaled back output to reduce excess inventories.

Exports measured by volume, which strip out price affects and correlate closely with production, fell 1 percent in July from the same month a year ago, the second drop in three months, a government report last week showed.

Tokyo-based Pentax, which makes cameras and medical equipment, said last month profit for the quarter ended June 30 fell 42 percent. The company cut its digital camera inventory by 12.5 percent in the quarter after price declines and increased competition pushed that unit into a loss.

Casio Computer Co., which makes liquid-crystal displays for digital cameras, mobile phones and televisions, said on Aug 2. profit for the quarter ended June 30 fell 31 percent on declining screen prices and handset sales.

``Prices of thin film transistors will probably fall at least 10 percent this year, compared with our earlier expectation of 8 percent,'' Akinori Takagi, a managing director at Casio, told reporters on Aug.

Costlier Oil

Crude oil was trading above $70 a barrel in New York and gasoline reached a record after Hurricane Katrina shut refineries along the Gulf of Mexico and halted 95 percent of oil production in the region.

Crude oil for October delivery rose as much as 82 cents, or 1.2 percent, to $70.63 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $70.43 at 1:11 p.m. Tokyo time. Crude has risen about 62 percent this year.

Rising oil prices may hurt consumer spending as well as corporate profits in Japan, and the global economy, Vice Finance Minister Koichi Hosokawa said on Aug. 29.

Production in July fell 2.2 percent from a year earlier, today's report said, the biggest drop since June 2002.

A survey conducted by the government included in today's report showed manufacturers plan to boost production 2.3 percent this month and next. Actual production figures have come out lower than the survey projections for the past 17 months.

Positive Projections

``Projections for the next two months are good, and if things go as forecast, we'll be able to confirm that the economy is recovering from a temporary slump,'' said Kazuo Mizuno, chief economist at Mitsubishi Securities in Tokyo.

Spending by households headed by a salaried worker dropped 3.5 percent in July, seasonally adjusted, the statistics bureau said yesterday. Economists had predicted a gain of 1 percent. Retail sales fell 2.2 percent, more than economists expected.

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

Last Updated: August 31, 2005 02:14 EDT