Spending, output plunge as Japan's economy takes bigger hit than expected

Japan's economy had a bigger hit from last month's disaster than anticipated, with factory output falling the most since at least the end of the US occupation, underscoring calls for the central bank to add stimulus.

Factory output dropped a record 15.3 per cent from February and household spending plunged 8.5 per cent from a year earlier, government reports showed yesterday. Data also showed retail sales fell the most in 13 years.

The economy's deterioration makes Prime Minister Naoto Kan's task of sustaining confidence in Japan's government debt harder after Standard & Poor's downgraded its outlook for the nation's rating this week.

"Plunges in output and exports will weaken consumer spending and that may prompt discussions for more stimulus," said Masayuki Kichikawa, chief economist at Bank of America- Merrill Lynch in Tokyo.

"The Bank of Japan will be compelled to consider adding more stimulus around the middle of the year as we get a clearer picture of how weak demand is."

Economic and Fiscal Policy Minister Kaoru Yosano said he was confident supply chains would recover earlier than expected even though the output number was "devastating".

Household spending, output and retail sales all slid by more than the median estimates in Bloomberg News surveys of economists.

The nation's unemployment rate was unchanged at 4.6 per cent, beating economists' forecasts for a 4.8 per cent reading.

Payroll data may have been skewed by the fact the Government couldn't collect responses from Miyagi, Fukushima and Iwate prefectures, areas in northern Japan most devastated by last month's quake.

Kan last week proposed a 4 trillion ($60 billion) extra budget likely to be the first of several packages to rebuild.

Since the disaster, the central bank has doubled the size of its asset-purchase fund, injected record amounts of cash into money markets and unveiled the one-year lending programme.

Toyota, Honda and Nissan, Japan's three biggest carmakers, said domestic output plunged in March. Japan's exports dropped in March for the first time since November 2009 and consumer confidence fell the most on record, reports showed last week. Toyota said on April 22 it would be able to normalise its production in Japan from July.

"Disruptions from supply chains and power shortages have been bigger than anticipated," said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.

Radiation readings at the Fukushima Dai-Ichi nuclear power plant rose this week to the highest since the earthquake and tsunami.

"Instability in the power supply has a direct impact on corporate production plans, potentially shrinking production by more than might be expected merely as a result of a series of power cuts," said Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities in Tokyo.

Toyota's output in Japan plunged 63 per cent to 129,491 vehicles in March from a year earlier and the company has estimated it may have lost production of 300,000 cars in Japan and 100,000 abroad because of quake-related shutdowns.

Companies said they were planning to increase output 3.9 per cent this month and 2.7 per cent in May, according to yesterday's report, an indication factory production will resume as supply constraints ease.

S&P cutting the outlook on Japan's AA- local-currency credit rating to "negative" from "stable" highlights the challenge for the Government of financing rebuilding and supporting a recovery without adding to the world's biggest public debt burden.

Rating companies are concerned politicians may fail to forge a consensus for tackling a debt equivalent to about 200 per cent of gross domestic product.

The Finance Ministry projects a 997.7 trillion total for the year started April 1.

- BLOOMBERG

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