Japan economy sees signs of emerging recovery; factory output up for first time in 6 months

Japan's struggling manufacturers are showing signs of life: The government said that industrial production rose for the first time in 6 months in March. What's more, the outlook offered further reason for optimism. Factory output -- pivotal in this export-oriented economy -- is projected to rise 4.3% this month and another 6.1% in May. Stocks surged after the data's release, with the benchmark Nikkei 225 index soaring nearly 4%. After tumbling sharply in recent months, industrial production rose 1.6% in March from Feb., the Ministry of Economy, Trade and Industry said. It marked the first climb in half a year and beat Kyodo news agency's average market forecast for a 0.9% uptick. "Japanese industrial production is turning the corner at a high speed," said Masayuki Kichikawa, chief economist at Bank of America Securities-Merrill Lynch in Tokyo. "These figures should serve as strong evidence that the economy is on a recovery track." The central bank followed with its own relatively upbeat appraisal after the policy board left the key interest rate unchanged at 0.1%. While it projects Japan's GDP to contract 3.1% this fiscal year through March 2010, it sees a turnaround emerging in the second half. "Recently, signs of a leveling out of economic activity are beginning to be seen globally" in the wake of government stimulus plans around the world, the Bank of Japan said in its closely watched semiannual economic outlook report. The assessment echoed similar sentiments Wednesday from the Federal Reserve, which said while the economy's still receding, the pace of decline "appears to be somewhat slower" than the last time policymakers met in mid-March. Any rebound in the U.S. would be critical for Japan, which relied on foreign sales of its cars & electronic gadgets to drive economic growth. Faced with an unprecedented collapse in global demand, the economy -- the world's 2nd-biggest -- has been mired in its deepest recession since the end of World War II. Major exporters such as Toyota & Sony have moved quickly to adjust by reducing shifts, suspending factory lines & announcing thousands of job cuts in the past months. Their strategy may now be paying off as they move to replenish slim stockpiles. The monthly industrial production gains rep a marked turnaround from Feb.'s 9.4% plunge and January's record 10.2% drop. The climb was led mainly by electronic parts & general machinery, said the Ministry of Economy, Trade and Industry. Inventories dropped 3.3% in March in the third consecutive monthly drop, while shipments grew 1.4%. Other recent economic figures contain glimmers of hope. Exports in March managed to rise 2% from the previous month, the first increase in nearly a year. The central bank is also treading carefully. Although positive signs emerged, it remains uncertain whether the developments will lead to a steady recovery of the world economy, it said, citing ongoing economic & financial risks as well as a new one: swine influenza. The Bank of Japan announced it organized a "swine influenza response team" headed by Gov. Masaaki Shirakawa to "gather relevant information" and ensure it is able to "continue providing essential central banking services under evolving conditions." PM Aso's Cabinet submitted a massive supplementary budget to finance a new stimulus package. The proposal calls for a record 15 T yen ($155B) in government spending, equivalent to about 3% of Japan's GDP. The administration says the newest stimulus package will help protect the economy from slipping further while laying the foundation for future growth, including incentives for buying eco-friendly cars & home appliances. It also provides support for the unemployed & small businesses. The new consumer subsidies should help spur production among automakers in particular, noted Chiwoong Lee, an economist at Goldman Sachs in Tokyo. He expects production to keep growing until autumn but warned that it could "fall back between then and the fiscal year-end due to deterioration in the employment situation & weak consumption."