Japanese factory output shrinks

Factory production fell 2% last month, that was much more than economists were expecting, and compares with a rise of 1.6% in December.

Concern is rising that Japan's export-dependent economy is being hurt by the slowing US economy.

That was fuelled by Bank of Japan board member, Atsushi Mizuno, who said that growth was at a standstill.

Falling production in January was blamed on slower demand for electronics parts in Asia and Europe.

Rate cut?

Economists are forecasting that the Bank of Japan (BoJ) will not be able to raise interest rates beyond 0.5% any time soon and possibly may be preparing for a cut.

"I think the BoJ may need to cut rates around the middle of this year," said Yasuhiro Onakado, chief economist at Daiwa SB Investments.

There were no hints from Mr Mizuno - one of the most hawkish BoJ policy makers - that the BoJ had shifted from its neutral stance, saying that rates were so low that the effect of another cut was uncertain.

But he warned that economic growth in 2008 could suffer from falling global demand for exports, which could lead to weaker wage growth and less consumption.

China overtook the US as Japan's biggest trade partner last year and it has been hoped that fast growing Asian markets and Europe would be able to offset the impact from a sharp US slowdown.

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