Japan's industrial production declined in April from the previous month, according to the revised data released by the Trade Ministry Thursday.
The revised data reported that industrial output fell 0.2 percent in April, raising concerns about the country's faltering economic growth momentum. An increase of 0.2 percent growth was reported initially in April.
The continuing crisis in Europe, the weakness in the U.S. market and the strengthening of the Japanese yen have hampered the growth of Japan's export-focused companies. With the likelihood of Greece's exit from the euro zone looming large, the debt crisis in Europe has revived, consequently affecting Japan's market sentiments adversely. Investors have withdrawn from risky assets leading to a stronger yen.
Construction projects in Japan are on a rise in tsunami-damaged areas. However, except for the boost from reconstruction spending that largely reflects the replacement of lost assets, economic fundamentals are relatively weak. Business sentiment is lackluster and firms are downbeat about prospects for any improvement before the second half of the year.
Underlying business investment is weak, albeit on a gradual upward trend, and is unlikely to become a prop for economic growth when other support, particularly government funded reconstruction spending, fades, David Rea at Capital Economics said.
Earlier this month, Japan reported that its gross domestic product (GDP) rose 1.2 percent in the first quarter as compared to the last quarter of the previous year. The eco-car subsidy helped drive consumer spending and public investment increased as earthquake-related reconstruction work got underway. But businesses are cutting back on investment in anticipation of a slowdown in demand when the eco-car subsidy expires later this year.
Firms have little incentive to invest with weak underlying domestic demand and poor external demand prospects due to the strong yen and a slowing global economy. Business investment is unlikely to provide much of a boost to the economy once support from government-funded reconstruction spending ends.