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Japanese output lifts prospects

Japan's consumer prices are continuing to fall.
Japan's consumer prices are continuing to fall.

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2001 GDP in $U.S. billions
1. Japan 4,141
2. China 1,159
3. India 477
4. South Korea 422
5. Australia 369
6. Taiwan 297
7. Hong Kong 162
 8. Indonesia 145
9. Thailand 115
10. Malaysia 88
Sources: World Bank,
Taiwan government

TOKYO, Japan (CNN) -- Japan's industrial production is growing faster than expected, lifting prospects for the world's second-largest economy.

Japanese exporters are also getting a boost from a weaker yen, which is trading at 119.35 in Tokyo on Friday.

Figures released by the government Friday morning show output grew 2.5 percent in May from a month earlier. That followed a fall in April.

The seasonally adjusted figure was well above market expectations of about 1.6 percent.

Richard Jerram, Tokyo-based economist for ING Financial Markets, told CNN on Friday morning that the production figures were looking "pretty good".

With inventories just above recent lows, he said there was a lot of scope for output to continue to increase.

Jerram said that despite the persistent short-term gloom about Japan's economy, demand and jobs had been holding up well over the last six months.

Other figures released Friday show Japan's jobless rate in May was unchanged at 5.4 percent, just below the record 5.5 percent seen in January.

But Jerram said the encouraging aspect was that after two years, the Japanese economy finally was adding jobs.

The number of employed in May rose 40,000 to 63.6 million and more people were looking for work.

Jerram noted that while the economy was improving, it was not moving quickly enough to overcome the country's underlying problems of deflation and bad debts in the banking system.

Jerram criticized what he said was a lack of economic policy action by the government of Prime Minister Junichiro Koizumi.

He told CNN the Koizumi government had no interest in the economic agenda and was prepared to "look the other way" for as long as it possibly could.

Despite the brighter prospects generated by the lift in production, the extent of Japan's lingering economic malaise is clear from other data released Friday.

This shows Japanese prices are continuing to fall and households are still cutting their spending.

Japan's core nationwide consumer price index fell 0.4 percent in May from a year earlier, the 44th straight month of decline.

Average spending by households of Japanese wage earners, a key gauge of personal consumption, fell a real 1.8 percent in May from a year earlier, the Ministry of Public Management, Home Affairs, Posts and Telecommunications said.

Some economists say any further improvement in Japan's economic prospects depends heavily on exports, particularly to its key market, the United States.

"The outlook for industrial production hinges on external demand, demand from the United States," Seiji Shiraishi, chief market economist at Daiwa Securities SMBC, told Reuters news agency.

"Housing starts in U.S. are strong but other sectors look uncertain so you can't be too optimistic," Shiraishi said.

Jerram agreed that a rebound in the United States would help Japan. But he told CNN that Japan's economic improvement over the last six months was largely attributable to gains in domestic consumption and investment.

ING's forecast for Japan's GDP growth in the 2003 financial year ending next March remains at 1.7 percent, well above the consensus forecast of 0.4 percent. It is also predicting 1.7 percent for the 2004 financial year.

Jerram said earlier this month that while the Japanese economy lacked dynamism, it did not appear to be sliding back into recession.

However, after four straight quarters of expansion, Japan's economy registered zero growth in the first three months of 2003, according to a report by the Cabinet Office last month.

Global bank HSBC has a forecast of 0.5 percent growth for Japan in calendar 2003 and 0.0 percent in 2004.

Along with its problems of deflation, bad debts, a high jobless rate and a lack of progress on structural reform, Japan's slowdown is being exacerbated by the steady shift of manufacturing jobs to China, where labor is cheap and consumer markets are expanding.

Big Japanese companies, particularly in the automotive and consumer electronics sector, have shifted much of their production capacity to China.

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