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Japan’s Output Drop, Jobless Rise Portend Contraction

Japan’s industrial production decreased and the unemployment rate unexpectedly climbed in October, providing early signs that the country’s economy will likely shrink this quarter.

Factory output declined 1.8 percent from September, the sharpest drop since February 2009, the Trade Ministry said in Tokyo today. The jobless rate increased to 5.1 percent from 5 percent and the economy lost 180,000 jobs, the most since May, according to the statistics bureau. Bond prices rose.

The figures add to evidence that Japan’s economy may contract for the first time in five quarters, as the expiration of stimulus measures and weak exports prompt companies such as Toyota Motor Corp. to reduce production. Japan’s central bank may face pressure to ease policy further as sluggish demand fuels deflation, according to economist Yuichi Kodama.

“Japan will probably remain in an economic lull until the end of March as exports are slowing,” said Kodama, chief economist at Meiji Yasuda Life Insurance Co., Japan’s third-biggest life insurer. “It will be difficult for the BOJ to just stand by doing nothing” because “the government will likely increase pressure on the BOJ to take more actions after the turn of the year,” he said.

The yield on Japan’s five-year government debt declined 1.5 basis points to 0.445 percent as of 11:05 a.m. in Tokyo. The yen traded at 84.12 against the dollar at 11:45 a.m. in Tokyo, from 84.27 before the unemployment report was released.

0.9 Percent Contraction

Japan’s real gross domestic product is expected to shrink at a 0.9 percent annualized pace in the three months through December, according to a survey of 42 economists by the Japanese government-affiliated Economic Planning Association.

Industrial production fell for a fifth month in October, today’s report showed. The median estimate of 25 economists surveyed by Bloomberg News was for a 3.2 percent decline.

Manufacturers said they plan to increase output 1.4 percent in November and boost production 1.5 percent in December, a government survey included in today’s report showed.

Japanese Economy Minister Banri Kaieda said that while the output figures were better than expected, the economy’s rebound still is on hold.

“Overall consumption has yet to rebound while prices keep tumbling. We realize the Japanese economy is stalling,” he told reporters today in Tokyo.

Price Declines

Japanese consumer prices excluding food dropped for the 20th straight month in October, and exports grew at the slowest pace this year, figures released last week showed.

“The rebound in exports to Asia has run its course and exports to the U.S. and Europe remain weak. Such a condition will likely continue for a half year or so,” Meiji Yasuda Life’s Kodama said.

The Japanese parliament passed on Nov. 26 an extra budget to fund a stimulus package aimed at fighting deflation and combating the stronger yen. To foster growth, the Bank of Japan last month cut its benchmark interest rate and created an asset- purchase fund to buy government and corporate debt and assets such as real estate investment trusts and exchange-traded funds.

More BOJ Easing

“Chances are high” that the BOJ will expand its 5 trillion yen ($59 billion) fund to respond to an economic slowdown and lingering deflation, said Meiji Yasuda Life’s Kodama. The central bank may buy more risky assets using the fund, he said.

Toyota Motor, the world’s biggest automaker, said last week that its domestic vehicle production fell for a second month in October. Honda Motor Co. and Nissan Motor Co., Japan’s second and third largest automakers, also cut their domestic output. A government subsidy program for fuel-efficient cars ended in September.

Consumers rushed to buy vehicles before the end of the government’s subsidy program, helping the nation’s economy grow at a 3.9 percent annual pace last quarter.

Exporter earnings are also under threat from the yen’s strengthening of more than 10 percent this year.

Nikon Corp., the Japanese maker of cameras, lenses and chip-making equipment, this month cut its full-year operating profit and revenue forecasts, citing a stronger yen. The company revised its assumptions for the currency’s exchange rate to the dollar to 80 yen for the six months from Oct. 1, from 90 yen projected three months ago.

More Jobs

In one encouraging sign for hiring, there were 93 newly advertised jobs in October for every 100 people who started looking for work that month, the most since 2008, the Labor Ministry said in a separate report today. Economists consider it a leading indicator for employment. The job-to-applicant ratio climbed to 0.56, meaning there were 56 job openings for every 100 candidates.

Meanwhile, Japan’s monthly wages rose 0.6 percent from a year earlier to 268,951 yen in October, the eighth straight increase, the Labor Ministry said in a report today in Tokyo.

Some economists including Noriaki Matsuoka at Daiwa Asset Management Co. in Tokyo said that today’s better-than-expected output figures could mean the economy’s performance will exceed expectations this quarter.

“I was worried the economy was going to slide into a slump, but today’s reports reduced that risk,” Matsuoka said. “I think the economy bottomed out in October and we’re going to see the beginning of another recovery starting November.”

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