March 30 (Bloomberg) -- Japan's industrial production unexpectedly fell last month, snapping the longest expansion in nine years. Output will rebound to a record as demand for cars and flat-panel televisions climbs, a government survey showed.

Production fell a seasonally adjusted 1.7 percent from January, led by chemicals, the trade ministry said in Tokyo. It declined in February in each of the past four years, in part because manufacturing is disrupted by the Lunar New Year holidays.

Manufacturers including Toyota Motor Corp. and Matsushita Electric Industrial Co. increased production in the previous six months, the longest expansion since 1997. The Nikkei 225 Stock Average climbed above 17,000 for the first time in five years, led by manufacturers, on expectations global demand will be sustained in the months ahead.

``Companies surveyed by the government projected their production would show pretty good performance in March and April,'' said Koji Ochiai, senior market analyst at Mizuho Securities Co. in Tokyo. ``Today's numbers don't suggest the expansion of Japan's industrial production is derailing.''

The Nikkei 225 Stock Average rose 0.6 percent to 17,045.34 at the 3 p.m. close in Tokyo, trading above 17,000 for the first time since Sept. 1, 2000. The yield on Japan's benchmark 10-year bond rose half a basis point to 1.775 percent. The yen traded at 117.54 per dollar from 117.69 before the report was released.

The median forecast by 38 economists surveyed by Bloomberg News was for production to rise by 0.1 percent from last month.

Chemicals

Today's report signals that production gains will resume this month. Production will rise 0.3 percent this month and 3.1 percent in April, the government said, citing its own survey of manufacturers.

``We don't think there is a significant change in the upward trend for production,'' said Kazuaki Hasegawa, an official at the trade ministry. ``Even when production is on a rising trend it is quite common to see occasional dips.''

Output cuts by chemical makers were the source of about a third of the decline. Chemicals accounted for almost all of the 0.4 percent production increase in January and about a third of December's gain, according to calculations made by Bloomberg News based on government data.

Today's number ``does suggest that after seeing very strong growth in the second half of last year, things are cooling off a bit,'' said Peter Morgan, chief economist at HSBC Securities Japan Ltd. in Tokyo. ``I'm inclined to see it as a blip. Most of the indicators we're looking at have been quite strong.''

Seasonal Adjustment

The past four years have shown declines in production in February, suggesting the government's seasonal adjustment of data may exaggerate drops in the month, said economists including Jan Lambregts, head of research at Rabobank in Singapore. China and other countries in Asia celebrate the Lunar New Year by taking holidays, part of which fell in February this year.

``We suspect some difficulties with the seasonal correction factor,'' Lambregts wrote in a report today.

Production rose 3.7 percent from a year earlier, the biggest gain since December, today's report showed. The year-earlier comparisons don't take into account fluctuations from seasonal adjustments, making them more reliable to gauge trends.

Japan's economy grew at an annualized 5.4 percent in the fourth quarter, outpacing growth in the U.S. and Europe, as consumer spending and exports surged. The economy is poised to expand 3.4 percent in the year ending March 31, the fastest since 1991.

Global Growth

Growth in the 30-nation Organization for Economic Cooperation and Development is expected to strengthen to 2.9 percent this year from 2.7 percent in 2005 on faster expansion in Japan and Europe, the World Bank said in a report today.

The bank raised its 2006 growth forecast for most of Asia to 6.6 percent from 6.2 percent as demand for the region's technology exports picks up in the U.S., Europe and Japan.

Accelerating growth in the U.S., Japan's largest export market, will support production and overseas sales in the coming months, economists said. The U.S. economy will probably expand at an annualized 4.7 percent in the first quarter, the fastest in more than two years. Exports to the U.S. rose 22 percent in January, the most in almost nine years.

Imports have also been surging after reaching a record in 2005, rising at their fastest pace in a decade in February as companies imported more oil and electronics parts. A gain in consumer and land prices in some areas has also eased price pressures, signaling Japan's battle with more than seven years of deflation is ending.

Manufacturers, encouraged by signs of strong demand in the coming months, are increasing production. Toyota Motor, Japan's largest automaker, boosted domestic production 7.5 percent in February, the sixth consecutive gain.

Matsushita Electric Industrial Co., the world's largest producer of plasma televisions, this month said it would increase capacity at its new production line in western Japan by almost a third to meet higher demand. The Osaka-based company last month raised its profit forecast to a nine-year high of 130 billion yen.

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

Last Updated: March 30, 2006 01:09 EST