Japan's Industrial Production Plunges In May

Japan's industrial production declined in May from the previous month, according to data released by the Trade Ministry Friday.

The data reported that industrial output fell 3.1 percent in May, raising concerns about the country's faltering economic growth momentum. A decrease of 0.2 percent was reported 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. The debt crisis in the euro zone has revived with the rising borrowing cost of Spain and Italy, consequently affecting Japan's market sentiments adversely.

Construction projects in Japan are on the 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.

The overall picture is that underlying business conditions are anemic and likely to remain so, increasing the risk that the economy will be self-supporting when government stimulus fades, David Rea, an economist 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.

In April, the Bank of Japan further eased the monetary policy so that the economy could recover in strength from deflation. The central bank raised the asset purchase program to 40 trillion yen ($494 billion) from 30 trillion yen. This easing, which is the second this year, was seen as a response to the political pressure to fight deflation. The first easing in February certainly helped in weakening the yen and lifting confidence in equity markets.