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   For Now at Least, Japan Dodges Moody's Bullet
Japan Output Still Slumping Despite December Jump
TOKYO — Japan's industrial production rose unexpectedly in December but this appeared to be a mere blip for slumping output, which for all of 1998 posted its worst drop in 23 years, government data showed on Thursday.

The latest data came as Moody's Investors Service raised alarm at Japan's fiscal stance — already the most rapidly deteriorating among the Group of Seven industrialized nations — leaving the door open for a future ratings downgrade.

Output rose 1.3 percent in December from November, the Ministry of International Trade and Industry said, well above the average 0.2 percent rise forecast by economists in a Reuters survey and MITI's own prediction of a 0.3 percent increase.

But analysts said the improvement was largely a result of huge public works spending, not private demand, and MITI acknowledged that the numbers did not show any recovery trend.

"Public demand is really the only support, exports look like they're on the downtrend, and private demand at best is stabilized and, as we see things headed, is likely to continue trending down," said economist Richard Hostetter at West LB Securities.

Shipments rose 1.4 percent in January, while bloated inventories shrank 1.7 percent, MITI said.

But for the October-December quarter industrial production dipped 0.4 percent, and for the full year it fell 6.9 percent, the first fall in five years and the biggest since the 1970s oil shocks.

Moreover, while MITI forecast manufacturing output would rise 1.0 percent in January, the ministry said it would likely slip back 0.9 percent in February.

"Downward pressure on output from stock adjustment is not as strong as it has been, but inventory levels are still high," a MITI official said. "It is now a question of how much final demand will spur output growth."

But economists said they saw little sign of private demand picking up.

Retail sales fell 4.7 percent in December from a year earlier, while overall wholesale and retail sales fell 5.2 percent, MITI reported separately. "The severe situation will remain in January and it is difficult to find positive signs in this data," another MITI official told reporters, adding that there was no evidence of a lift yet from the government's massive tax cut packages.

"I think consumers are worried about uncertainty in the future and reluctant to buy," he said.

Domestic car production in December, released later on Thursday by an auto industry group, fell 8.0 percent from a year earlier, and for the whole of 1998 was down 8.4 percent.

The bounce in industrial production could give the government more breathing room before a decision, expected by many economists, to pump more money into the economy in an attempt to hit the official target of 0.5 percent economic growth for the fiscal year starting in April.

Hostetter at West LB told Reuters Television the government would likely wait to see January-March economic data and some of the April-June figures before compiling a stimulative supplementary budget.

Japanese foreign exchange and bond markets largely ignored the data and reacted only mildly to comments by Vincent Truglia, managing director of influential ratings agency Moody's, who dismissed market rumors that his presence in Tokyo marked any imminent downward revision in Japan's Aa1 sovereign rating.

But he left the door open for future action, saying that with the economy headed for another year of contraction, the government is padding its revenue through bond issues, threatening to push the ratio of debt to gross domestic product as high as 140 percent by 2003.

"This would be far in excess of anything ever seen in an industrialized country," Truglia said.

Lehman Brothers economist Matthew Poggi, saying that a mid-year extra budget was likely, said the ensuing increase in government debt to pay for the package would further push up long-term interest rates.

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