Japanese Stocks Drop on Lower Factory Output, Deflation; Kobe Steel Falls

Japanese stocks fell after industrial production dropped unexpectedly and consumer prices declined more than estimated, raising concerns the nation’s economic recovery will stall.

Kobe Steel Ltd., Japan’s fourth-largest steel mill, tumbled 7.2 percent after the nation’s factory output declined 1.5 percent in June. Asahi Glass Co., which makes glass for construction and automobiles, dropped 2.7 percent. Mitsubishi Estate Co., Japan’s second-biggest developer by sales, led real- estate companies lower as its profit slumped on declining home sales. Nippon Express Co. plummeted 9.7 percent after the freight company slashed its profit outlook because of higher transport costs and writedowns. Stocks also fell as the unemployment rate increased unexpectedly.

“Industrial production figures showed the economy is weaker than it looked in spring,” said Yoshinori Nagano, a senior strategist in Tokyo at Daiwa Asset Management Co., which oversees about $104 billion. “Companies are feeling the economy is slowing down and recovery momentum is weakening.”

The Nikkei 225 Stock Average dropped 1.6 percent to 9,537.30 at the 3 p.m. close in Tokyo, the most among Asian equity indexes. The broader Topix index lost 1.4 percent to 849.50, with almost seven stocks declining for each that rose. All 33 industry groups in the Topix retreated.

For the week, the Nikkei and the Topix are up 1.1 percent and 1 percent respectively, their second straight weekly gains.

Peak Earnings Reports

The Topix has lost 6.4 percent in 2010, compared with a 1.2 percent drop by the S&P 500 and a 0.9 percent gain by the Stoxx Europe 600 Index. Stocks in the Japanese benchmark are valued at 16.4 times estimated earnings, compared with 13.3 times for the S&P and 11.9 times for the Stoxx.

Today is the peak for April-June earnings reports in Japan, with 322 companies announcing results out of the 1,671 companies in the Topix index, according to data compiled by Bloomberg.

Kobe Steel slumped 7.2 percent to 181 yen, the third- largest drop in the Nikkei 225. JFE Holdings Inc., Japan’s second-largest steelmaker, lost 3 percent to 2,675 yen. Asahi Glass retreated 2.7 percent to 880 yen. Nippon Electric Glass Co. dropped 3.3 percent to 1,101 yen.

Japan’s industrial production unexpectedly decreased 1.5 percent in June from a month earlier, the Trade Ministry said today in Tokyo. The median estimate of 26 economists surveyed by Bloomberg News was for a 0.2 percent increase.

Deflation Persists

Japan’s statistics bureau said consumer prices excluding fresh food fell 1 percent in June from a year earlier, after a 1.2 percent decline in May.

“The biggest reason for deflation is a lack of investment opportunities for businesses,” said Hisakazu Amano, who helps oversee about $18 billion in Tokyo at T&D Asset Management Co. “The situation won’t improve anytime soon regardless of what measures the central bank or government take,” as deflation drags down economic growth.

Real-estate companies fell the most among the Topix index’s 33 industry groups led by Japan’s two biggest developers Mitsubishi Estate and Mitsui Fudosan Co. which reported profit declines.

Mitsubishi Estate said net income for the three months ended June 30 fell 30 percent to 6.77 billion yen as home sales fell. Mitsui Fudosan said first-quarter profit slid 72 percent to 4.49 billion yen as vacancy rates rose, crimping earnings from office leasing. Mitsubishi Estate plunged 4.1 percent to 1,218 yen while Mitsui Fudosan lost 3.9 percent to 1,280 yen.

Developers Plunge

“Real-estate companies’ earnings were weak, because of poor rentals and condominium sales,” said Kazuhiro Takahashi, a general manager at Tokyo-based Daiwa Securities Capital Markets Co. “Today’s jobs data showed employment is not likely to increase and that is also dragging down the market.”

The nation’s unemployment rate increased to 5.3 percent in June from 5.2 percent a month earlier, according to the statistics bureau. That compares with the median estimate of 5.2 percent by 26 economists surveyed by Bloomberg News.

Nippon Express plummeted 9.7 percent to 352 yen, the most in the Nikkei. The freight company slashed full-year net income forecast 32 percent to 17 billion yen, citing higher fuel costs and writedowns. It kept its sales target at 1.6 trillion yen.

Yen Rises

Japan Tobacco Inc. sank 3.1 percent to 278,000 yen. The cigarette maker said first-quarter net income fell 47 percent to 22.8 billion yen after domestic sales dropped and a stronger yen reduced the value of overseas earnings.

The yen appreciated to as much as 86.25 against the dollar, the strongest level since Dec. 1. Against the euro, Japan’s currency strengthened to 112.63 from 113.53. The higher yen reduces income at Japanese companies when overseas revenue is converted into local currency.

“The yen has been strong and that’s creating an unfavorable investment environment for Japanese stocks,” Daiwa Asset’s Nagano said.

Sony Corp., the maker of Bravia televisions, jumped 3.6 percent to 2,705 yen, the fourth-biggest gain in the Nikkei. The company raised its full-year earnings forecasts after sales of TVs helped it post an unexpected profit last quarter. Sony projected net income will rise to 60 billion yen from a loss of 40.8 billion yen a year ago.

To contact the reporter for this story: Akiko Ikeda in Tokyo at iakiko@bloomberg.net.

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