Japan's industrial output rose strongly in the final quarter of last year, spurred by demand for electronics goods, with a slight drop in December unlikely to knock the country's economic recovery off track.
Output rose 3.6 percent in October-December over the previous three months, the Ministry of Economy, Trade and Industry (METI) said on Thursday, though it fell 1.0 percent in December from November, below a Reuters poll forecast of a 0.6 percent fall.
"I thought it was a fairly neutral number in that we had the biggest surge in a generation in the past three months so that a modest decrease was to be expected," said Richard Jerram, chief economist at ING Securities.
Strong demand for Japanese electronics and other goods in recovering world markets has helped lift the economy out of a 10-year slump, boosting production and spurring companies to increase investment in their businesses.
Demand is especially strong from China, which is sucking in capital and consumer goods to feed an economy that grew at some nine percent last year.
Private economists see the strong exports and output helping Japan's economy grow an annualised three to five percent in the October-December quarter, beating July-September's 1.4 percent gain.
METI said output of digital electronics goods such as cameras and DVD players was firm in the October-December quarter, while in December mobile phones and semiconductors stood out.
"We don't have the impression that the foundation is less firm," a METI official said. "Most companies remain optimistic."
Several top Japanese firms reported strong earnings for the October-December quarter, supporting that outlook.
Canon Inc's net profit rose 25 percent in the period and it said it expects to sell more than 15 million digital cameras in 2004, almost double last year's amount.
Car makers Nissan Motor Co and Mazda Motor Corp also reported strong sales, and profits rose at electronics firms NEC Corp and Fujitsu Ltd.
Other economists also focused on the 1.4 percent fall in inventories in December as a sign that conditions are improving.
"The headline figure on output is slightly weaker than expected but it's not all bad news here because inventories are down 1.4 percent - that's an improvement," said Yoshimasa Maruyama, economist at Mizuho Research Institute.
Inventories at car makers for example fell 13.3 percent in December thanks to strong demand overseas.
One cloud on the horizon, however, is the sharp rise of the yen, which makes Japanese goods more expensive on world markets and cuts profits at exporters.
Japan has repeatedly sold yen in the currency markets in recent weeks, but the yen remains close to 105 to the dollar, a level exporters have said could be painful if it continued.
However Bank of Japan Policy Board member Teizo Taya said in a speech on Thursday that the impact of the yen's rise on exports had so far been limited, offset by growing demand from Asia where trade is largely carried out in yen.
But he warned that the global effects of a weaker dollar would need watching.
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