The ministry of international trade and industry said on Tuesday that industrial production fell a seasonally adjusted 0.7 per cent in May from the previous month, hitting its lowest level in five years. Combined with the 3.4 per cent plunge in April and the ministry's forecast of a 1.7 per cent rise in June, the latest data suggest that industrial output will shrink about 1.2 per cent in the current quarter.

The April-June economic data will play a key role in determining whether the government compiles a fiscal-stimulus package in the autumn. Officials have said they'll wait until the early September release of gross domestic product data before deciding on new steps. The figures on Tuesday were an early indication that output will be a drag on growth for the quarter.

On a bright note, however, the governmentsaid the jobless rate eased to 4.6 per cent in May from a record 4.8 per cent in the previous two months. But the lower unemployment rate mostly reflected the fact that more people found part-time jobs in May. Analysts said concerns about job and wage security are likely to continue.

Meanwhile, spending by wage earners in the same month rose 1.5 per cent from the year-earlier month in real terms, to 336,354 yen ($2,771) on average, even though incomes fell 1.1 per cent from a year earlier.

Overall, Tuesday's data indicated that efforts by the government to shore up the economy through public-works spending, debt guarantees for small and medium-size businesses and income tax cuts are starting to pay dividends, economists said.

``These factors are helping to support employment,'' said Brian Rose, senior economist at Warburg Dillon Read in Tokyo. ``If you pour enough money into the economy, it'll grow, at least temporarily.''

But while such fiscal shock therapy may be supporting the labour market to someextent, it has yet to trigger a sustained recovery in private demand, economists said.

In fact, the final demand continues to fall short of companies' expectations. Based on corporate surveys, the ministry previously forecast output would rise 1.2 per cent in May. The fact that output actually fell showed that company forecasts several months ago were overly optimistic.

Industrial production isn't likely to pick up significantly as long as companies are burdened with excessively high levels of inventories in the face of sluggish shipments, economists said.

The so-called inventory-to-shipments ratio rose 0.8 per cent in May to 106.9, suggesting that supply continues to exceed demand.

``The high inventory ratio is a big disincentive to produce more without confirming the strength of final demand,'' said Hiroshi Kuribayashi, economist at Barclays Capital in Tokyo.

Moreover, stagnant industrial production is making companies less inclined to hire new workers. Underscoring the weak demand for labor,the Labor Ministry said the number of job offers fell to 46 for every 100 seekers in May, down from 48 a month earlier. Economists also point to a new troubling trend: the growing tendency for companies to target middle-age workers when making layoffs in their restructuring efforts.