Japan builds up recovery hopes

TENTATIVE signs of Japan's emergence from recession were provided by a lower-than-expected fall in industrial production in July and the first increase in construction orders in 18 months, writes Diane Coyle.

Industrial output fell 1.7 per cent, after a 2.7 per cent increase in June, taking it 0.6 per cent lower than a year ago. Economists had predicted a 2 per cent fall in July.

The Ministry of International Trade and Industry predicted that manufacturing output, the biggest component of industrial production, would rise 1.6 per cent in August and fall 1.3 per cent in September, implying a third quarter total just above the level of output a year earlier.

Andrew Milligan, chief economist at New Japan Securities, said a sharp fall in inventories - 6.1 per cent in the year to July - suggested higher demand was at last feeding through to manufacturers. He expected an improving trend in production.

Construction orders rose 17.8 per cent in the year to July, the first increase in the annual rate in 18 months. Orders dropped 2.9 per cent in the 12 months to June. Analysts said the figures suggested the industry was past its nadir.