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Japan's economy shrinks but output grows

  • Story Highlights
  • Japan's inudstrial output increases 1.6 percent last month
  • First increase after five months of straight losses
  • However Bank of Japan says economy to continue to contract into 2010
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TOKYO, Japan (CNN) -- Conflicting indicators about the health of Japan's economy emerged on Thursday.

Employees of Nissan Motor Company work on the assembly line in Japan.

Employees of Nissan Motor Company work on the assembly line in Japan.

Japanese industrial output increased for the first time in six months, but the Bank of Japan said it expects the nation's economy to continue to contract into 2010.

Industrial output increased 1.6 percent in March, the Ministry of Economy, Trade and Industry reported Thursday. It was the first rise after five straight months of losses.

The ministry had predicted a bit of a turnaround for March and April.

The news buoyed Japanese markets, boosting the Nikkei average nearly 4 percent on the day.

Bank of Japan announced its economic forecast through the 2010 fiscal year on Thursday, which predicts an extended decline in the nation's economy.

The board said Japan's gross domestic product, a broad measure of economic output, is expected to shrink more than 3 percent for the 2008 fiscal year, which ended March 31.

The BOJ board expects the downward movement to continue through the 2009 fiscal year, with another 3 percent drop, before rebounding in 2010 with up to a 1.5 percent gain.

The Nomura/JMMA Japan Manufacturing Purchasing Managers Index gave reason for optimism, rising to 41.4 from 33.8 last month. The numbers suggest manufacturers anticipate an increase in production in the month ahead.

"That is probably the most important data we're seeing, because that's a reading of what manufacturers anticipate," said Hiromichi Shirakawa, chief economist of Credit Suisse Japan.

Many manufacturers have shut down production in the weeks leading to the May 1 "Golden Week" holidays, reducing inventories. As a result, Shirakawa believes they will increase industrial output during the next three months.

"We would not be surprised to see double-digit growth in the next month," he said.

Whether this will be a sustained growth, however, depends on U.S. consumers.

"Japan exports are very sensitive to demand for durable goods like automobiles and electronic goods," Shirakawa said.

The leveling off of the housing market in the United States and aggressive monetary policy by the Federal Reserve may be helping Japanese manufacturers, "but it's too soon to tell whether sustained demand will pick up," he added.

CNN's Kevin Voigt and Yoko Wakatsuki contributed to this story.

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