Weak Japan production shakes market

The poor production numbers undid any stock gains after Koizumi's strong showing at this weekend's elections

By CNN's Alex Frew McMillan and wire reports

TOKYO, Japan -- Industrial production in Japan dropped 0.7 percent in June, over the previous month.

That's the fourth straight month of declines, the Ministry of Economy, Trade and Industry (METI) reported Monday.

The severity of the drop took financial markets by surprise, wiping out any jubilation after Prime Minister Junichiro Koizumi's strong showing in Sunday's Upper House elections.

Analysts had expected a 0.2 percent dip. Poor industrial production was one of the first signs at the start of the year that Japan's economy was not pulling out of its slump, as hoped.

June was "a very weak report," said James Malcolm, senior economist with J.P. Morgan. "There are still no signs of stabilization there."

Inventories still sickly

In particular, there was no sign that an inventory backlog has improved. Those need monitoring, METI said.

Market watchers put a lot of importance on inventories. A backlog of goods has to be cut down before production can pick back up.

Malcolm noted there was no improvement in overall inventories. One silver lining in the numbers was a stabilization in the stockpile of producer goods, including electronics parts for export.

The July production numbers are also likely to be weak. METI on Thursday revised its outlook for the next month sharply downward. The ministry now expects a 2.3 percent decline, instead of a dip of 0.1 percent.

Industrial production has had three bad months before June. Malcolm expects production to drop 7 percent for the quarter, on an annualized basis.

The negative surprise undid a slight rise in stocks after a good showing for Koizumi's ruling Liberal Democratic Party in this weekend's elections.

After opening up, the benchmark Nikkei index turned sharply down. It finished the morning off 1.3 percent at 11,645.55.

The yen also rapidly lost ground against the dollar. It weakened to 124.30 to the greenback, after trading at 123.46 on Friday.

Reuters contributed to this report.