Japan's Two-Paced Economy

  More mixed news from Japan.Industrial production failed to rise in May from April's surge, despite earlier surveys suggesting that it would and retail sales were weak, strongly suggesting there will be no help for the economy from consumers, not with deflation now tightening its grip on the economy.Japan's Trade and industry Ministry said yesterday that & #160;output in May rose & #160;5.9% from April, which in turn was up 5.9% from March.A poll in April for May suggested a rise of 8.8% and economists had forecast a 6.9% rise (Source).Still, it was still the third monthly rise in a row and the 5.9% & #160;maintained the 56 year record pace seen in April, leading economists to claim that the economy & #160;is now growing from deep falls from & #160;December to March.But compared with a year earlier, May production was still down 29.5%.Higher output of & #160;automobiles, mobile phones and electronic devices were the main factors of the rise in May as wholesalers and retailers rebuilt stocks sold off in the early months of the year.Car production jumped 24.8% in May with inventories rising for the first time in three months, while electronic parts production rose 10.5%.Worryingly, the pace of growth in output is now expected to decline, with a 3.1% rise forecast for June and a rise of just 0.3% in July.The forecast for this month is slightly higher than the 2.7% rise first forecast in April, but that wasn't enough to disguise the noticeable drop in output forecast.The Bank of Japan's Tankan business survey due out tomorrow is likely to show the mood among big Japanese manufacturers improving from record lows a quarter ago.Despite these green shoots, the & #160;recession, the longest in Japanese history and & #160;one in which the economy shrank a total of 8.8%, has left & #160;huge overhang of capacity in factories, and rising employment.That means the outlook & #160;remains very tentative, as we have seen with the latest retail sales figures.Another & #160;ministry report yesterday showed retail sales fell 2.8% in May from a year earlier, the ninth monthly decline in a row. & #160;Retail sales were unchanged from April, after rising from March the month before.Department store sales fell 12.3% in May, the 15th monthly decline, and supermarket sales also fell.Tokyo economists said there are concerns that retail sales will fall further (especially with growing deflation) as the impact of the Government's stimulus packages wears off.The Japanese government has given cash handouts to every Japanese resident, & #160;as well as tax breaks for fuel-efficient cars and incentives for buying green-friendly televisions, refrigerators and air conditioners.The news won't improve sentiment in Japan where & #160;a sharp, 1.1% & #160;fall in inflation for May has left consumers facing a couple of years of deflation, or falling prices, which will add to the already enormous strains on business and production.That is going to add to the pain in retail stores and business for the next two years, which is how long the Government and the Bank of Japan see deflation lasting for.The pain of the slump will be nothing compared to the slow, torture of deflation. & #160;  

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