UPDATE 1-Japan factory output up, firms expect recovery

By Kaori Kaneko

TOKYO, Jan 31 (Reuters) - Japan's December factory output rose at the fastest pace in a year and a half and firms expect further gains, raising hopes that stabilising global demand and exports will help pull the economy from its slump.

The 2.5 percent rise in production was below the median market forecast for a 4.5 percent gain and followed a 1.4 percent decline in November, data from the Ministry of Economy, Trade and Industry showed on Thursday.

Manufacturers surveyed by the ministry raised their forecast for January to a 2.6 percent rise from an earlier forecast for a 2.4 percent gain. Firms expect production to increase 2.3 percent in February, indicating a moderate recovery in coming months.

The data may should encourage Prime Minister Shinzo Abe's government, which is gambling that big fiscal spending and open-ended monetary easing by the Bank of Japan can stir the economy from decades of stop-start growth and intermittent deflation.

'The results are not that bad and the forecasts show that production could continue to grow at a good pace,' said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

'We can say that production is bottoming out. Overseas economies are not likely to deteriorate any further, so this will support Japanese production and the overall economy.'

Separate data released on Thursday showed Japanese manufacturing activity contracted in January, but the pace of contraction slowed for the first time in four months as the country slowly recovers from an export-led slump.

Analysts expect Japan's economy will grow moderately this year as exports will recover led by a rebound in the global economy, while Abe's aggressive monetary and fiscal policy may also help boost the economy.

His ambitious strategy - dubbed 'Abenomics' - has sent the yen to hit a 2-1/2 year low and pushed share prices to 32-month high.

Under relentless pressure, the BOJ last week doubled its inflation target to 2 percent and pledged an open-ended commitment to buying assets next year to help beat deflation.

Earlier this month, the government compiled a 10.3 trillion yen ($114.5 billion) economic stimulus package as part of Abe's plans to revive the economy.

But in a $1.02 trillion draft budget for the next fiscal year approved on Tuesday, the government aims to keep new bond sales below tax revenues in a symbolic move to show its resolve to continue with efforts to fix Japan's tattered finances.

(Editing by Eric Meijer) Keywords: JAPAN ECONOMY/

(kaori.kaneko@thomsonreuters.com)(Reuters Messaging:)(kaori.kaneko.thomsonreuters.com@reuters.net)(+81-3-6 441-1983)

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