Japanese industrial production failed to improve its rate of increase in May, despite earlier surveys suggesting that it would.

Japan’s Trade and industry Ministry said this morning that output in May rose 5.9% from April, which in turn was up 5.9% from March. A poll in April for May suggested a rise of 8.8% and economists had forecast a 6.9% rise.

It was still the third monthly rise in a row and the 5.9% maintained the 56-year record pace seen in April, leading economists to claim that the economy is now growing from the first quarter slump.

But compared with a year earlier, May production was still down 29.5%. Higher output of automobiles, mobile phones and electronic devices were the main factors of the rise in May as wholesalers and retailers rebuilt stocks sold off in the early months of the year.

The Ministry said industries that mainly contributed to the increase were transport equipment; electronic parts and devices and iron and steel.

Worryingly, the rate of growth in output is now expected to decline, with a 3.1% rise forecast for June and a rise of just 0.3% in July. The forecast for this month is slightly higher than the 2.7% rise first forecast in April, but that wasn’t enough to disguise the noticeable drop in output forecast.

The news won’t improve sentiment in Japan where a sharp fall in inflation for May has left consumers facing a couple of years of deflation, or falling prices, which will add to the already enormous strains on business and production.

Deflation increases the real cost of money, even if interest rates are at record lows; forces consumers and business to delay spending (because they know the price will be lower in future times) and will make recovery from the export led recession even tougher.

Consumer inflation in Japan has now retreated from a decade high 2.4% peak a year ago on the back of high prices for oil, grain and other commodities. The fall is around 3.5% from that peak, with much of the fall coming from a combination of falling prices from the recession’s impact, and lower prices for commodities from 2008’s records (such as Australian iron ore, coking and thermal coal)..

The core figure was down 0.5% in May thanks to lower prices for oil, grains and business inputs (coal and iron ore, for example), plus the impact of the stronger yen driving down the cost of the already lower priced imports.

Japan may go through an inventory growth phase in the next few months, as businesses rebuild stocks, but with little reason to buy, consumers and business won’t spend, forcing growth in the economy back into negative territory.

With global demand weak, exports won’t save Japan and employment, as they did from 2002 onwards. Japan has a lot of domestic stimulus underway, but little of it will force already overbought consumers to buy more cars, electronics goods, food or other consumer durables.

China is experiencing much the same effect at the moment, especially in business where producer prices fell by more than 7% in the year to May, the biggest fall on record.