Japan, South Korea factory output slumps as Asia shifts

By Stanley White and Kim Yeonhee

TOKYO/SEOUL (BestGrowthStock) – Factories in Japan and South Korea cut output in October, adding to evidence of an Asia-wide slowdown and boding ill for the rest of the world that has relied on the region to keep the global economy humming.

Japanese companies cut production for the fifth month and by the biggest margin since February 2009, while South Korea’s industrial output fell for the third month in a row, disappointing markets which had bet on a rebound.

In contrast, India asserted itself as a regional standout, reporting on Tuesday that its economy grew 8.9 percent in the past quarter from a year earlier.

Asia’s third-largest economy handily beat market forecasts, but it has a long way to go to become a global source of demand that could fill the void left by debt-ridden Europe and the United States, which are struggling to take off.

The fall in Japan’s output was expected — in fact a drop of 1.8 percent was smaller than the forecast 3.3 percent decline — after a key stimulus measure, incentives for buyers of fuel-efficient cars, expired in September, and exports continued to cool.

The drop, however, cemented expectations that the world’s third-largest economy after the United States and China would contract in the final quarter of the year after a stimulus-driven spurt in the third quarter.

South Korea, among the first economies to regain cruising speed after the global recession, is also losing steam, though Seoul still bets on solid export growth next year.

“The inventory rebuilding cycle after the recession has come to an end, and what we’re left with is final domestic demand, which isn’t doing that well across the globe,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

“We will see some slowdown in G3 economies and Asia next year. With the European situation unraveling, the risks are more conspicuous.”

Weak output reports added to the bearish tone in financial markets, with Asian stocks (.MIAPJ0000PUS: ) and the euro under pressure from fears that other euro zone nations may be forced to seek help after Ireland’s 85 billion euro rescue.

ASIAN ECONOMIES COOLING MORE THAN EXPECTED?

The numbers follow reports from across Asia that showed most economies were losing traction in the third quarter faster than thought as the initial spurt of foreign demand late last year and early in 2010 waned.

Economists had long expected Asia and the world economy would slow in the second half of this year and early in 2011 as the rebuilding of inventories that had been depleted during the recession was drawing to an end and the effects of stimulus packages were wearing off.

But the cool-down came sooner and turned out to be more pronounced than many economists had anticipated. The economies of the Philippines, Thailand and Singapore all contracted in the past quarter, while growth in South Korea, Taiwan and Indonesia slowed markedly.

That leaves China, which slowed only marginally to a 9.6 percent annual clip in the third quarter, and India, as the mainstays of growth in the region.

However, Beijing’s fears that inflation may get out of hand mean the authorities will probably try to cool the economy further.

Japan’s production data coincided with a purchasing managers’ survey for November that showed a third consecutive decline in manufacturing activity and a sharp drop in export orders. Official data also showed household spending fell last month, boding ill for the final months of the year.

Manufacturers’ forecasts that they would crank up production in November and December offered some hope, but did little to change expectations that the Bank of Japan will keep its ultra-loose monetary policy and stand ready to ease it further.

The central bank would probably do it by topping up its 5 trillion yen asset buying scheme after it has already effectively pushed interest rates down to zero.

In South Korea, a surprising 4.2 percent drop in output in October from September convinced analysts that the central bank there will keep rates on hold in December after a rise this month, but economists and businesses were more upbeat about the outlook than their Japanese peers.

“Since the policy effects, such as advanced budget spending in the first half of this year fizzled, the decline was inevitable but is merely technical,” said So Jae-yong at Hana Daetoo Securities.

“Because facility investment and exports are maintaining strong momentum, the economy will remain fundamentally at a solid pace.”

(Additional reporting by Rie Ishiguro, Yoo Choonsik, Manoj Kumar and Rajesh Kumar Singh; Writing by Tomasz Janowski; Editing by Neil Fullick)

Japan, South Korea factory output slumps as Asia shifts