* Nippon Steel posts first quarterly rise in output since 2014
* Japan's top steelmaker f'casts 35 percent drop in annual profit
* JFE Steel predicts flat growth for the year
By Yuka Obayashi
TOKYO, July 29 (Reuters) - Japanese steelmakers boosted output over April to June, with top producer Nippon Steel & Sumitomo Metal posting its first such rise since 2014 on improved prices, but their annual profits are expected to be eroded as a firm yen hurts key customers.
Higher Japanese output, at a time when the world's biggest producer China is also churning out record volumes, could dent a recovery in Shanghai steel futures that have risen 40 percent in 2016 after plunging 70 percent over the past six years on a global supply glut.
Nippon Steel's output rose 3 percent from a year ago over April to June, its first increase in seven quarters, while JFE Steel, a JFE Holdings unit, also expanded production by 6 percent. In the past two years, a price slump and slow demand at home had forced them to trim output.
Despite the higher output, both firms swung to quarterly losses for the first time in about four years, hit by oversupply and a firmer yen. Nippon Steel forecast a 35 percent drop in annual profit and JFE predicted a flat growth for this year.
While steel prices are up, China's overcapacity and exports remain a drag, which together with "shrunk demand for value-added energy pipes and a stronger yen" hit the firm's results, Nippon Steel's executive vice president, Toshiharu Sakae, said.
China's average daily crude steel output reached a record high of 2.316 million tonnes in June. The country, which is under fire from global rivals for dumping cheap steel exports on to the world market, plans to eliminate 100-150 million tonnes of annual production over the next five years.
"The market will continue swinging up and down this year as Chinese mills boost output when prices rise and cut output when prices fall," Nippon Steel's Sakae said.
Japanese steelmakers are also keeping an eye on the yen as a firmer currency could hurt their profits and that of their customers, such as automakers who account for 20 percent of the domestic steel demand.
So far this year, the yen has soared 14 percent on safe-haven demand after Britain voted to leave the European Union.
"The firmer yen affects not only us but also our customers ... they may change stance in price negotiations or cut output plans. That's why we want stable currency," JFE's executive vice president, Shinichi Okada, said on Friday.
However, Nissan Motor, which took a hit of 34 billion yen in April-June due to a higher yen, has said it will not change its local production strategy due to currency volatility. (Reporting by Yuka Obayashi; Editing by Himani Sarkar)