Industrial output for May fell 1.2 percent from the previous month to mark the third consecutive month of decline, according to a preliminary report released Thursday by the Ministry of Economy, Trade and Industry.

The decline follows a 2 percent drop in April.

The seasonally adjusted production index of mines and factories was 98.5 against the 100-point benchmark established in 1995. The reading is the lowest since January 1999, when the index read 96.1.

A ministry official attributed the month-on-month decline to a drop in production of such items as mobile phones and semiconductor manufacturing equipment.

However, the ministry maintained its overall assessment that production is falling and will monitor production activities, particularly in light of rising inventories.

The ministry expects industrial output to grow 0.3 percent in June and decline 0.1 percent in July on a month-on-month basis. However, the official added that the expected growth in June is so small that it might turn out to be a negative figure.

Inventories for May grew 0.8 percent on a month-on-month basis, rising for its fifth consecutive month. The seasonally adjusted index of inventories was 101.1, which is the highest since November 1998, when it hit 101.5.

The official cited stagnant sales for the rising inventories but noted cases in which manufacturers are actively increasing inventories of items like air conditioners and components for electronic toys.

Shipments for May remained unchanged from the previous month and the seasonally adjusted index of shipments was 100.7.

Upturn anticipated

Major businesses are expecting conditions to improve in the July-September quarter, according to a government survey.

The Ministry of Economy, Trade and Industry said Wednesday its survey shows the business sentiment index at 2 for the third quarter of this year, up from minus 28 for the April-June quarter.

Quarterly sales and earnings indexes exhibited a similar hopefulness.

The index is calculated by subtracting the percentage of companies with pessimistic outlooks from those with optimistic ones.

The ministry also said the quarterly sales and earnings indexes exhibited a similar trend by rising from minus 23 to 12 for sales and from minus 24 to 9 for earnings.

The optimistic showings should be discounted somewhat, however, because the poll was conducted in mid-May, when Prime Minister Junichiro Koizumi’s Cabinet had just been named and national sentiment was sky high, a METI official said.

Of more importance are the dismal readings for business conditions in the current quarter, which worsened from the preceding survey for the January-March quarter, although the two surveys are incomparable in exact terms, he said.

The latest survey covered 1,744 Japanese companies, excluding financial and real estate firms, with at least 100 million yen in capital, a workforce of 50 or more and overseas subsidiaries. The response rate was 62.9 percent.

Previously, the ministry’s quarterly survey covered 447 firms that were not as strictly defined, the official said.

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