Output drop further dents Japan mood

By CNN's Geoff Hiscock and wire reports

TOKYO, Japan -- A sharp drop in industrial output and retail sales dealt another blow to confidence in Japan's faltering economy Thursday.

That sent Tokyo share prices to 17-year lows for a second day running, with the benchmark Nikkei 225 average plunging almost 1.5 percent or 160 points by mid-morning to 10,820.

Industrial output fell for a fifth straight month in July, slipping 2.8 percent from a month earlier on a seasonally adjusted basis, preliminary data from the Ministry of Economy, Trade and Industry showed.

The weak output and sales figures for July coincide with forecasts that next week's June quarterly gross domestic product figures will be negative.

Already in industrial recession

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That means Japan's economy could contract for two consecutive quarters -- a common definition of recession -- for the fourth time in a decade.

Most economists say Japan is already in an industrial recession, with almost daily reports of further job cutbacks. Toshiba said on Monday it would slash 12 percent of its Japan-based workforce between now and March 2004.

That followed earlier cutbacks by industry counterparts Fujitsu and NEC. On Tuesday, Japan announced a record jobless rate of 5.0 percent, with an expectation of more pain to come.

The Yomiuri Shimbun reported Thursday morning that high-tech maker Kyocera was planning to cut 10,000 jobs, and Oki has also announced it would trim its workforce by 2,200.

Need to stimulate demand

ING Barings chief economist in Tokyo, Richard Jerram, told CNN that a "fairly clear recession is underway in Japan".

He said the administration of Prime Minister Junichiro Koizumi had to stimulate demand in Japan. That meant weakening the yen and possibly even a tax cut to boost consumer spending.

Koizumi, who has enjoyed record public popularity since coming to power in April, has repeatedly warned that Japan must undergo more pain before gain. His reform agenda promises tough action on Japanese banks' bad loans, and further deregulation of the economy.

But there has been little action so far, although an extra budget is expected to be unveiled in the next few weeks. Analysts say Koizumi must seize his chance and act aggressively to get the economy moving again.

Earlier this week, Merrill Lynch chief economist in Japan, Jesper Koll, said Japan was in a deep and accelerating industrial recession.

He said job-shedding would outpace job creation over the next six to nine months, but the transition to a services-based economy would have a positive effect by the middle of 2002. The industry ministry Thursday lowered its assessment of production, saying it was declining further and that future movements such as a rise in inventories required close monitoring.

"Obviously we're still down seriously year on year," said Chris Walker, economist at CS First Boston in Tokyo, adding that he expected the weak trend to continue.

Nationwide retail sales fell for the fourth straight month in July, down by 2.7 percent from a year earlier.

Sales at larger stores, which are more sensitive to changes in consumer spending, fell 3.0 percent, excluding new store openings and closures.

Soon after the figures were released, the Tokyo stock market opened on a grim note, with the Nikkei average slipping further below levels last seen 17 years ago.

Reuters contributed to this report.