Japan heads for new year recovery

Economics: Tokyo reports rising output and investment, but US sees new fall in consumer confidence

Early signs of recovery in the Japanese economy helped the Nikkei share price index climb above 20,000 yesterday for the first time in more than a year.

Across the Pacific, new signs of economic slowdown in the US took Treasury bond prices to their highest for more than two years. The yield on the benchmark long-term bond had fallen to 6 per cent by midday.

US share prices also moved up, helping equities in London to close just below their record levels. The FT-SE 100 index ended just over 18 points higher at 3,676.4.

The pound climbed sharply against the dollar yesterday. It closed nearly 2 cents higher at $1.5602, and also rose more than a pfennig to DM2.2330. Its index against a range of currencies rose 0.6 to 83.6. Traders said that a single big purchase of sterling in the Far East in very thin holiday trade accounted for the move.

Japan's industrial output rose unexpectedly sharply in November, and the Ministry of Trade and Industry said it expected production to climb in December and January too. The 1.3 per cent gain last month was the second increase in a row, after months of declining production.

The leading indicator for the Japanese economy rose above 50, the dividing line between recovery and recession, for the first time in October, according to figures released by the Economic Planning Agency. Although the EPA warned that it was too early to be sure of a clear upward trend in the economy, the figures boosted optimism about corporate earnings.

The Nikkei 225 share price index closed up more than 107 points at 20,011.76, the highest since October 1994. Technology and electronics stocks led the advance. Yesterday's optimism was a contrast to earlier gloom about Japan's prospects for emerging from its economic slump. Economists steadily revised down their forecasts for growth throughout 1995.

``There is certainly a more upbeat mood now. This year is ending on a strong note,'' said Stephen Hannah, head of research at IBJ International.

Hannah Nixon, an economist at Deutsche Morgan Grenfell, said: ``The figures signal the turning point for the economy. There should be a gradual recovery in 1996.''

Officials at Miti said that output was growing faster than forecast. The electronics and telecommunications sectors were likely to spearhead growth, and investment spending was on the increase.

Construction orders last month were 10.4 per cent lower than a year earlier, but the industry is expected to start to recover. New housing starts rose 0.1 per cent in the year to November, the first increase for nine months. The auto industry remained weak, however.

Finance minister Masayoshi Takemura said: "I hope that the economy will be able to regain a 2 to 3 per cent level of growth.'' The reversal since April of the yen's earlier surge against the dollar -thanks to intervention by the Group of Seven industrial countries - had contributed to the recovery.

At IBJ, Mr Hannah said there was still great uncertainty about the state of the financial sector hanging over the economy. Banks would have to write off substantial debts during the first quarter of 1996. The rising trend in unemployment - which reached 3.4 per cent last month -would make consumers cautious about spending.

US statistics yesterday added to the evidence that growth is slowing. Consumer confidence fell in December, according to a survey by the Conference Board.

Sales of existing homes fell 1.7 per cent in November, although they remained 9.5 per cent higher than a year earlier. Economists said this was a sign of slower economic growth, but falling mortgage rates would underpin the housing market.

Official US statistics have been delayed by the continuing Federal Government shutdown.