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UPDATE 2-Japan July output down, second month of decline

(Adds comment from economist, details)

By Ritsuko Ando

TOKYO, Aug 30 (Reuters) - Japanese industrial production fell unexpectedly for the second straight month in July, stoking fears that an export-led rebound in the world's second biggest economy was losing steam.

Data released by the Ministry of Economy, Trade and Industry on Friday showed that manufacturing output shrank 0.4 percent in July from June, when production dropped 0.2 percent, suggesting companies were scaling back in preparation for tough times ahead.

A Reuters poll of economists this week yielded a median forecast of a rise of 0.9 percent, seasonally adjusted.

The production data cast a cloud over a better-than-expected rise in gross domestic product for April-June of 0.5 percent.

"The industrial production figures are a bit more of a concern because it seems that they're losing momentum," said Yoshimasa Maruyama, economist at Mizuho Research Institute.

The data showed that shipments fell 0.6 percent from June while inventories rose 0.6 percent.

"Although output seems to be in a slow rising trend, it has fallen in the past two months and the outlook on final demand is unclear," said Kazuaki Hasegawa, a ministry official.

Fading consumer confidence in the United States and a strong yen are potential problems for Japan's big manufacturers, which do not have a strong domestic economy to fall back on.

The ministry figures do not distinguish between shipments for the domestic market and export, but a 1.6 percent fall in production of electronic machinery, including personal computers, was the main drag on the month-on-month figures.

The year-on-year figures for industrial production put the data in a slightly more positive light.

The rise of 3.3 percent from a year earlier was the first year-on-year rise since January 2001.

There is also some bullishness about the near-term outlook. The report showed manufacturers expecting output to rise 4.5 percent in August.

However, they expect it to drop by 2.5 percent in September.

CARS DRIVING EXPORTS

Carmakers in particular remain bullish.

"We had very strong exports in the first six months of this year and there are no signs yet that exports are losing steam," Keiko Sato, a spokeswoman at Toyota Motor Corp , Japan's biggest automaker, told Reuters.

"In contrast, the market environment at home remains severe."

Japan's domestic vehicle production rose 5.1 percent in July from a year earlier to 928,745 vehicles, the Japan Automobile Manufacturers Association said on Thursday.

The July gain came after a fall in June of 1.5 percent.

The association said it estimated that exports in July rose about 15 percent from a year earlier.

The yen has stabilised somewhat after rising to 1-½ year highs around 115.50 to the dollar in July, but it has stayed within striking distance of those levels. On Friday, the yen was trading at around 118 to the dollar.

Reflecting strong demand for cars, the production data showed transport equipment output rose 11.3 percent year-on-year in July, although it declined 0.5 percent from the previous month.

But the recovery is still patchy for most of the country's exporters, including high-tech manufacturers.

"Sales of telecommunications equipment, chips and computers haven't recovered from the doldrums," said Chris Shimizu, a spokesman for NEC Corp, Japan's biggest maker of telecommunications equipment.