Japan Hits Speed Bump With Sharp Drop in Industrial Output

(Bloomberg) -- Japan's factory output fell by the most in nearly seven years in January, while retail sales also slid more than expected. Still, the economy's export-driven growth trend remains intact.

Industrial production contracted 6.6 percent in January from December, the biggest drop since March 2011, when the nation was hit by an earthquake, tsunami and nuclear meltdown. Output fell across all sectors, with the cars and auto parts performing especially poorly. Production is forecast to have rebounded sharply in February before falling again in March.

Global demand has driven eight straight quarters of economic growth, Japan's longest expansion in nearly three decades, and analysts still predict another increase in the first quarter of this year. Yet the production and sales data, the yen's recent jump and protectionist trade measures from the U.S. offer a reminder that Japan's economy is vulnerable to shifts in external demand.

"For now, I don't think we need to change our view that Japan's economy will continue a gradual recovery," said Taro Saito, director of economic research at NLI Research Institute. "The big production drop just doesn't make sense after we had robust exports in January as they usually go to the same direction."

The January output figure also indicates that domestic demand isn't strengthening enough, said Yasutoshi Nagai, chief economist at Daiwa Securities in Tokyo. "It's only one month's worth of data, but when it swings below forecasts this much, you have no choice but to be more cautious," Nagai said.

Masaki Kuwahara, senior economist at Nomura Securities, points to the strengthening yen as a risk for corporate profits and investment. "That's what we're watching the most," he said.

The details:

• Industrial production fell 6.6 percent in January from December (forecast -4.0 percent).
• Year-on-year output increased 2.7 percent (forecast +5.3 percent).
• It's projected to jump 9 percent in February from January but fall 2.7 percent in March.
• Retail sales fell 1.8 percent in January from December (forecast -0.6 percent).
• Year-on-year sales gained 1.6 percent (forecast +2.4 percent).
• Sales at department stores and supermarkets rose 0.5 percent from a year earlier (forecast +0.4 percent).

--With assistance from Toru Fujioka Yuko Takeo and Connor Cislo

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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