Japan Industrial Output Falls 1.8%

TOKYO—Japanese industrial output dropped at the fastest pace in 20 months in October, a further sign of fragility in the nation's economic recovery, as the expiration of government purchasing subsidies for new cars led to shrinking auto production.

Output fell 1.8% in October compared with the previous month, data from the Ministry of Economy, Trade and Industry showed Tuesday, deeper than the 1.6% decline in the previous month and marking the fifth-straight monthly fall.

The result, however, was much better than the 3.3% fall economists expected. Analysts said the higher figure was mainly due to a boost in production of flat-screen TVs as companies anticipate a surge in demand before subsidies for energy-efficient home appliances are sharply reduced in December.

Even so, the data will do little to soothe investor concerns over the state of the Japanese economy, which some expect to further stagnate as exports, the nation's key engine of growth, begin to lose steam.

Production is likely to remain sluggish as smaller government-subsidy programs offer less support to domestic demand and slowing global growth means fewer orders from overseas, analysts said. That would likely drag on Japan's already stagnant labor market, which in turn could further depress sentiment and bite into domestic consumption.

Separate data released Tuesday showed Japan's jobless rate rose to 5.1% in October, while household spending slipped 0.4% during the month. Daiwa Institute of Research economist Hiroshi Watanabe said the unemployment rate may rise toward 5.5%, just 0.1 of a percentage point behind the worst level on record.

Other data released Tuesday added to the grim view. Japan's housing starts rose 6.4% on year in October, weaker than the 10% gain economists expected. Construction orders slipped 5.6%, the government said.

Analysts also saw cause for concern in the inventory-shipments ratio for October, which rose 7.6% in the month after climbing 1.3% in September. Companies raising inventories at a faster pace means further declines in output are likely, analysts said.

"This is certainly a bad sign," said Daiwa's Mr. Watanabe.

Analysts added that a cautious approach also must be taken toward firms' relatively bullish output forecasts for the next couple of months. The data showed manufacturers, on average, think production will increase 1.4% in November and 1.5% in December.

Firms may be factoring in an anticipated surge in demand for flat-screen televisions until the end of November, analysts said. The government is providing purchasing subsidies for new TVs ahead of the switch to digital broadcasting next year, but those subsidies will be halved from December due to a lack of funds.

"You must not be so optimistic on this, and we should remain cautious about production going forward," said Hirokata Kusaba, a senior economist at Mizuho Research Institute.

During October, production of automobiles fell 10% from a month earlier, while general machinery—which includes flat-screen TV panels—rose 3.8%, the METI data showed.

The data also showed shipments fell 2.7% while inventories slipped 1.5%.