Weak exports, high prices hurt Japan

Cashiers work at a Tokyo supermarket, Wednesday, April 30, 2008. A slump in U.S. demand and soaring oil and food prices cast a pall over Japan's economy with March indicators showing Wednesday sluggish industrial output and falling household spending. (AP Photo/Itsuo Inouye)

TOKYO—Japanese industrial output dropped sharply in March as a slump in exports to the United States and soaring oil and food prices squeezed the world's second-largest economy, the government said Wednesday.

The data, compounded by fall in household consumption, confirmed worries that a slowdown in the U.S. was weighing on the Japanese economy, which depends on exports for 15 percent of gross domestic product.

Industrial output, a key indicator of growth, fell 3.1 percent in March from the previous month, marking the first decline in two months, the Ministry of Economy, Trade and Industry said. The figure was far worse than a 0.7 percent decline expected by Dow Jones Newswires and Japanese business daily, the Nikkei.

"The March output fall was fairly large and it is a reflection of a fall in exports to the U.S.," Economy Minister Hiroko Ota told reporters.

Adding to the gloom, higher oil and food prices drove Japan's overall household spending down 1.6 percent in March from a year earlier, the Ministry of Internal Affairs and Communications said. It was the first decline in four months.

Also Wednesday, Japan's central bank decided to keep a key interest rate unchanged at 0.5 percent. The decision was widely expected amid continued uncertainty over the U.S. economy and its impact on global markets.

The Bank of Japan was noticeably somber in its semiannual outlook report released later in the day.

The policy board expects inflation to rise 1.1 percent this fiscal year through March 2009, compared with a 0.4 percent rise it projected in October. Members also forecast real domestic product to grow by 1.5 percent, lower than a 2.1 percent rise they expected six months ago.

"Given the current situation, where the outlook for economic activity and prices is highly uncertain, it is not appropriate to predetermine the direction of future monetary policy," the report said, suggesting that the central bank is unlikely to adjust rates anytime soon.

Not all the economic news was negative. Data also showed the unemployment rate dropped to 3.8 percent in March from 3.9 percent in the previous month. The total number of jobless in March stood at 2.68 million, down by 130,000 a year before, the ministry said.

But the slump in exports to the U.S., a major market for Japan, has stirred concern. Tokyo just last week reported a 30 percent drop in its overall trade surplus in March because of surging prices of oil and natural gas imports.

The trade ministry said shipments of transportation products such as passenger cars and trains fell 4.5 percent month-on-month in March. Exports of communication devices such as mobile phones and video cameras dropped 6.4 percent.

"Weak demand in the U.S. is a major factor of the March industrial output. While auto exports grew in other areas such as Russia, U.S.-bound vehicle shipments were falling sharply," said Hideki Matsumura, a senior economist at the Japan Research Institute.

Overall industrial shipments in March declined 3.9 percent from the previous month, while industrial inventories edged up 0.2 percent, the ministry said.

Experts also said the outlook for Japan's household spending would remain bleak amid sluggish domestic consumption weighed down by soaring oil and food prices.

"Given that salary levels being flat, current gasoline and food prices are hitting household spending hard," Matsumura said.

In March, gasoline prices jumped 19 percent from a year earlier, and bread costs soared 37 percent with prices of instant noodles up 17 percent, according to the government.