Japan’s Factory Output Slides Under Pressure From Global Slump

(Bloomberg) --

Japan’s factory output suffered its second-largest drop in the last five years in June as trade tensions and a slowdown in the global economy dragged exports lower for a seventh straight month. Unemployment, by contrast, fell back to its lowest level in about 26 years.

Industrial production dropped 3.6% from a month earlier, pulled down by lower output of autos and flat panels, according to the economy ministry. The fall was more than twice the amount economists had forecast and pushed output to its lowest level since January 2017.

While the factory data shows the pressure on Japan’s economy from external forces, the fall in the jobless rate to 2.3% points to resilience at home that has helped prop up overall economic growth so far.

Key Insights

• With trade tensions and a global economic slowdown weighing on exports, domestic demand has become a vital prop for Japan’s economy. While capital spending and consumption kept the economy growing through the start of the year, a sales tax in October could transform that dynamic if it hits domestic demand.
• The latest figures strengthen the likelihood that Japan’s economy contracted in the second quarter. Economists surveyed by Bloomberg earlier in July expect the economy to shrink 0.1%.
• The data come ahead of a Bank of Japan policy decision later Tuesday amid growing speculation that the BOJ will strengthen its pledge to keep rates low. The output slide makes it increasingly difficult for the central bank to argue that the economy will pick up in the second half of this year.
• Rising tensions between Japan and South Korea could also take a toll on Japan, though Korea would likely take the bigger hit.
• Despite the tight labor market, inflation remains subdued well below the BOJ’s policy target. It is expected to slow further in coming months.

What Bloomberg’s Economists Say

“Looking ahead, we expect output to be more or less unchanged in 3Q from 2Q. Inventory accumulation for last-minute household purchases ahead of a sales-tax hike slated for October is likely to support production. Pulling the other way, weak external demand will likely weigh on production.”
-- The Asia Economist Team
Click here to read more

Get More

• Industrial production fell 4.1% from a year ago.
• The job-to-applicant ratio in June was 1.61. In May it was 1.62, down slightly from the the highest level in more than 40 years a month earlier.

--With assistance from Tomoko Sato, Toru Fujioka and Yuko Takeo.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig, Paul Jackson

©2019 Bloomberg L.P.