Japanese factory output jumped by the most in almost 60 years in May as manufacturers restore supply chains damaged by the massive earthquake and tsunami in March, the latest evidence the economy is headed for a V-shaped recovery from the disaster.
Manufacturers, however, forecast smaller gains in output in coming months as they adjust production schedules to cope with possible electricity shortages in the summer.
Industrial output rose 5.7 percent in May, above the median market forecast for a 5.5 percent increase and a 1.6 percent gain in April, the Ministry of Economy, Trade and Industry said.
It was the second-biggest increase on record after a 7.9 percent rise in March 1953.
The rebound in output, coming after encouraging signs of improvement in exports and retail sales, lends further support to the Bank of Japan's view that the economy will recover by the end of this year, reducing the need for additional monetary easing.
Forecasts for June are still high, but are not so high for July, suggesting a slight slowdown in the front loading of production, said Shunji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
Still the trend is healthy. Things are moving in line with the BOJ's scenario. It may be necessary for the BOJ to do something more to support small firms in areas damaged by the quake, but the need for broad-based monetary easing doesn't seem that strong.
The BOJ is expected to hold off on easing policy further at its rate review this month unless the Greek debt crisis triggers financial market turmoil severe enough to threaten Japan's outlook for a moderate recovery.
Automakers led the overall increase with output of transport machinery up a hefty 36.4 percent as they quickly mend supply chains hit by the quake. But output of chip and other electronic parts fell 0.6 percent in a sign that the recovery was still patchy.
Manufacturers surveyed by the ministry expect output to rise 5.3 percent in June but edge up only 0.5 percent in July.
Some companies may have front-loaded production due to the prospect of a power crunch this summer, when utilities will ask companies and households to cut power use to avoid blackouts.
Still, economists say the summer power shortage is unlikely to be serious enough to derail an economic recovery and agree with the BOJ that supply constraints will ease by September.
Japan's economy is expected to grow 1.0 percent in the third quarter after contracting for three consecutive quarters and suffering its second recession in three years, according to a Reuters poll.
The BOJ's tankan survey on Friday is expected to show major manufacturers turned pessimistic about business conditions in the second quarter for the first time since the Lehman crisis but they are likely to project a near-term recovery in confidence.
But signs of slowdown in the global economy linger as a potential risk for Japan's fragile economy.
A political stalemate over unpopular Prime Minister Naoto Kan's departure also risks slowing efforts to recover from the March disaster and could delay steps to tackle structural problems including massive public debt.
(Writing by Rie Ishiguro; Editing by Tomasz Janowski and Vidya Ranganathan)