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Japan's manufacturers cut production in February for a second month as the U.S., the country's biggest export market, verged on a recession.

Output fell 1.2 percent from January, when it slid a revised 2.2 percent, the Trade Ministry said today in Tokyo. The median estimate of 32 economists surveyed by Bloomberg News was for a 2 percent drop.

The first back-to-back declines in production in nine months indicate companies including Canon Inc. are concerned world demand will slow as the U.S. economy grinds to a halt. Economic and Fiscal Policy Minister Hiroko Ota said last week the U.S. slowdown may start to take its toll on the emerging markets where Japan ships more than half its exports.

“Output is at an adjustment stage,'' said Naoki Murakami, a senior economist at Goldman Sachs Group Inc. in Tokyo. “The drop might be softer in the next two months but we don't see signs of a production recovery yet.''

Companies surveyed said production will rise 2 percent in March before falling 1 percent in April.

The yen weakened to 99.95 per dollar as of 10:58 a.m. in Tokyo from 99.24 before the report was published. The yield on Japan's 10-year bond fell 2 basis points to 1.25 percent.

Reports last week showed a deepened housing slump is taking its toll on American consumers and that the U.S.'s six-year expansion may be ending. Japan's economy is also worsening, with unemployment rising in February, household spending stalling and inflation quickening to the fastest pace in a decade.

Tankan Survey

Growth in the U.S., the world's largest economy, will slow to 1.5 percent in 2008, according to the median estimate of 82 economists surveyed by Bloomberg News. That would be the slowest pace in seven years.

The Bank of Japan's quarterly Tankan survey of business confidence, due tomorrow, will probably show that sentiment among the country's biggest manufacturers fell in March to its lowest level in four years. The yen's rise and record oil prices are eroding profits, just as the U.S. slowdown is hurting sales.

Canon, the nation's largest camera maker, forecast that belt-tightening among U.S. consumers will cause sales in the Americas to fall for the first time in nine years.

Toyota Motor Corp., Japan's biggest carmaker, this month said the company may miss its 2008 sales target because the yen's gains make its cars more expensive overseas. The rising cost of steel is also making each sale less profitable, it said cashadvance. The yen has risen 14 percent against the dollar this year.

BOJ `Flexible'

The risk of a slowdown has investors betting the Bank of Japan will reverse its policy and cut interest rates this year. Traders see a 59 percent chance the central bank will lower the key rate from 0.5 percent by December, according to JPMorgan Chase & Co. calculations.

Three central bank policy makers — acting Governor Masaaki Shirakawa, Deputy Governor Kiyohiko Nishimura and board member Miyako Suda — this month said that the bank is ready to take “flexible'' policy steps if needed.

“Recent remarks by BOJ policy makers suggest the bank could cut rates if needed because downside risks are emerging,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “They've already laid the groundwork for a cut.''

Still, demand from Asia and Europe has so far helped manufacturers weather the drop in U.S. sales. From a year earlier, production rose 4.2 percent, today's report showed. Output has increased for 31 months on a year-on-year basis.

`Still Holding Up'

“There's no question that there's a severe downturn in the U.S. economy, almost certainly a recession, but the rest of the world is still holding up,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Japanese export growth unexpectedly quickened in February, thanks to higher demand from emerging markets, even as shipments to the U.S. fell for a sixth month.

Mitsubishi Motors Corp. said last month its overseas sales surged 41 percent in 2007, led by Russian demand. Japan's exports to Russia, where oil revenue is helping to expand the economy, have more than doubled in the past two years.

Demand from developing economies prompted Mitsubishi Motor, Toyota and Nissan Motor Co. to increase production in February, even as U.S. sales slow. Nissan, which forecasts sales to China will rise 11 percent to half a million cars this year, raised domestic output 28 percent from a year earlier.

At home, average monthly wages climbed 1.3 percent in February, the Labor Ministry said today, providing a boost to consumers whose confidence is at a five-year low because of higher prices of food and energy.

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