Japan July factory output falls but growth momentum seen intact

By Tetsushi Kajimoto

TOKYO (Reuters) - Japan's industrial output fell more than expected in July, pulling back from the previous month's gain, as manufacturers curbed production of general-purpose and electrical machinery in a likely sign of a temporary slowdown in factory activity.

Industrial output fell 0.8 percent in July from the previous month, dragged down by production of semiconductor production equipment, turbines and power generators, preliminary data from the Ministry of Economy, Trade and Industry showed on Thursday.

The reading compared with the median estimate of a 0.5 percent drop in a Reuters poll of economists, following a 2.2 percent increase in June.

Still, manufacturers forecast factory output would rebound in August, underscoring the view that Japan's economy, the world's third-largest, is on track to extend a growth run in the current quarter on the back of better external and domestic demand.

"Production fell in reaction to June's gains but it remains in a recovery trend," said Hidenobu Tokuda, senior economist at Mizuho Research Institute. "Likewise the overall economy will continue a steady expansion in the current quarter, although we cannot expect such robust growth seen in the previous quarter."

The rainy and cool weather in August may dampen consumer spending in Japan, while in the U.S. - Japan's key export market - damages wrought by hurricane Harvey was a source of concern, Tokuda said.

Besides the weather factors, there's no immediate risk to Japan's growth at least until later this year when China's economy could start to slow, and next year when the ongoing tech boom may peak out, he added.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 6.0 percent in August and decline 3.1 percent in September.

The ministry stuck to its assessment of industrial output, saying production is picking up over time.

Japan's economy expanded at the fastest pace in more than two years in the second quarter -- growing at a 4 percent annualised rate -- as consumer and company spending picked up.

Analysts expect the economy to continue growing at a healthy clip in coming quarters, offering the Bank of Japan hope that a tight labour market will finally start to boost wages and consumer spending.

(Reporting by Tetsushi Kajimoto; Editing by Kim Coghill & Shri Navaratnam)