Small comfort for Japanese economy

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Economics Correspondent

Japan's industrial output rose for the first time in five months in August, but it was only a temporary chink in the clouds of economic gloom.

Production will fall this quarter, the Ministry of Trade and Industry predicted yesterday.

Demand for beer and air-conditioners during the hot summer helped boost August's figure. So did the return to operation of chemicals plants that had been shut for summer maintenance.

There was a 2.4 per cent rise in output during the month. But the figure was below the 4 per cent increase MITI had expected.

''The figures certainly do not suggest that the economy has turned around yet,'' said Gerard Lyons, chief economist at securities firm DKB.

A MITI official said: ''We thought the hot summer might have more of an impact.'' The figures for last month did show a 4.5 per cent weather- related jump in consumer demand. Industrial demand for equipment and construction materials was up only 1 per cent.

The ministry's survey indicated that production was likely to fall 2.5 per cent in September and bounce 2.9 per cent in October. It expects a 2.6 per cent decline for the July-September quarter.

The biggest disappointment was the fact that stock levels barely fell last month, suggesting demand is barely keeping pace with output. Inventories fell by only 0.1 per cent, the second decline in nine months. The level of stocks is 5 per cent higher than a year ago.

Brian Pearce, chief economist at SBC in Tokyo, said: ''It does look like inventories are overhanging production.''

Economists think the combination of lower interest rates, the weaker yen and this month's supplementary budget will lead to a recovery in growth by early next year. But Mr Lyons said: ''It will be a very weak recovery by Japanese standards.''

MITI said that it normally takes three months for exchange rate changes to affect industrial production. The yen began to weaken in July, but did not start to fall decisively until the co-ordinated central bank intervention on 15 August.

The yen edged higher against the dollar yesterday, to 99.58 at midday compared with the previous close of 100.42. This leaves it 20 per cent below its April peak of 80.63 to the dollar.

Currency markets, which were generally quiet yesterday, did not react to lower than expected weekly jobless figures in the US. New claims last week fell to 335,000, taking the four week average down to 351,750. However, the US bond market fell in reaction, taking the yield on the benchmark long bond to 6.61 per cent.