Japan’s Economy, Stock Index Sink Lower

Japan said Monday that industrial production fell twice as much as expected in June, increasing pressure on companies to shed workers and cut costs as the world’s second-largest economy apparently sinks into recession.

The news drove the Nikkei 225 stock index to a new 16-year low, following a bigger-than-expected win by the ruling Liberal Democratic Party in Sunday’s Upper House election.

Production fell 0.7% in June from May, the fourth monthly decline, figures from the Ministry of Economy, Trade and Industry showed. Economists had expected a 0.3% drop.

Meanwhile, new data reported early today showed that Japanese consumer spending fell in June as stalled economic growth and record unemployment kept people from buying big-ticket goods such as cars and refrigerators. The nation’s jobless rate was unchanged at a record 4.9%.

By contrast, the U.S. unemployment rate was 4.5% in June.

Spending by salaried Japanese workers fell 3% in June from May, seasonally adjusted. Economists had expected spending to be unchanged, after inching up 0.1% in May. The economy shed 140,000 jobs in June, the fourth straight month of decline, government figures showed.

As waning overseas orders force companies such as Fujitsu Ltd. and NEC Corp. to cut production and shed workers, Prime Minister Junichiro Koizumi’s plans to trim public spending and force banks to write off bad corporate loans may face growing resistance.

Factory production fell 4% in the second quarter, a sign the economy probably shrank for a second straight quarter.

“Obviously it’s going to be a painful time,” said James Malcolm, economist at J.P. Morgan Securities (Japan) Ltd., who expects unemployment to reach 5.3% by the end of the year. “Policy-wise, you can already see a big shift toward a social safety net and a supplementary budget that will focus mostly on support for employment.”

Finance Minister Masajuro Shiokawa said the government will compile a supplementary budget as early as autumn to help workers displaced by Koizumi’s economic plans, the Yomiuri newspaper reported today.

The June jobless rate, which matches a record high, was below the 5% economists expected. Still, Koizumi’s promise to make banks write off 13 trillion yen ($104 billion) of their worst loans over the next two years will put more people out of work by holding debtor companies’ feet to the fire, economists say.

Koizumi, who led his party to victory in Sunday’s elections, so far has resisted calls to inject government money into the economy to get it growing again. He has pledged to hold new government bond borrowing this year to 30 trillion yen ($241 billion), below last year’s 34.6 trillion yen.

Koizumi also says he wants to cap spending on public works such as highways and dams. That could reduce jobs in the construction industry, which employs one in 10 Japanese workers.

Koizumi said Monday he’ll provide more details on his economic plans later this month.

“Some companies will have to cut jobs to improve profit or even to survive,” said Richard Jerram, economist at ING Baring Securities (Japan) Ltd. “Koizumi will have to provide more support for demand” by cutting taxes or spending more, he said.

Even as companies made fewer products last month, they couldn’t sell all they produced. The inventory ratio, which goes up when stockpiles increase faster than shipments, rose 2.4%, the government said.

Doubts about the economy’s near-term performance--and about the potential for Koizumi to make good on his long-term economic reform plans--continue to weigh on Japanese stock prices.

The Nikkei-225 index fell 1.9% to 11,579.27 Monday, sliding below the previous 16-year low of 11,609 set July 23.

Early today the Nikkei was rebounding somewhat. It was up 102.5 points, or 0.9%, to 11,669.48 at mid-morning.

The yen fell to 125.11 to the dollar in New York on Monday from 123.34 Friday. Monday’s close was the weakest the Japanese currency has been since July 16.

“The yen is likely to fall in any scenario,” said Keisuke Kitao, a foreign exchange manager at Bank of Tokyo-Mitsubishi Ltd. “If Koizumi succeeds in proceeding with his plans, that would bring pain and the yen will be sold, while if he fails that would disappoint the markets and the yen will be sold again.”