Japan’s Factory Output Falls as Global Slowdown Keeps Biting
Production fell 1.2% from a month earlier, declining for a second time in three months .
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Japan’s factory production dropped in August amid a global slowdown that’s battered exports leaving the economy vulnerable as a sales tax hike taking effect this week threatens to crimp domestic demand.
Production fell 1.2% from a month earlier, declining for a second time in three months, and leaving output 3.4% below its level in May, according to trade ministry data released Monday. Declines in output of steel, flat-panel making equipment and cars were the largest contributors to the drop. Economists had forecast a fall of 0.5%.
Separately, retail sales rebounded more strongly than expected in August, in a sign that shoppers are ramping up spending ahead of the tax increase on Tuesday, though the gains followed subdued spending levels during a prolonged rainy season. It was the biggest month-on-month increase since just before the previous tax hike in 2014.
Key Insights
- Slowing demand overseas, especially in China, has weighed on Japanese exports and factory production this year. It’s also made the economy more dependent on consumer spending, which is likely to take a hit from the sales tax hike.
- The factory output trend looks L-shaped after sharp falls in the first quarter and manufacturing data out of the U.S. and China aren’t pointing to a pickup this year, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group.
- The Bank of Japan this month said it’s looking carefully at whether overseas developments also have the potential to squelch inflation, raising expectations for more stimulus at the BOJ’s October meeting.
- The stronger-than-expected retail sales data showed a 17.4% sales jump from a year earlier at specialist large-scale electronics stores, with audio-visual gadgets showing some of the largest gains.
- Sharp jumps in consumer spending ahead of the tax hike could lead to cooling of demand afterward, though economists have so far judged last-minute demand to be weaker than in 2014.
- Tuesday’s Tankan survey will offer another read on the health of the industrial sector. The survey is forecast to show large manufacturers are the least optimistic they’ve been since 2013.
- Still, there are some signs the tech sector may be over the worst. Production of electronic parts and devices increased in August. BOJ Governor Haruhiko Kuroda said he sees a rebound in the global IT cycle and a recovery in memory chip prices suggests he may be right.
What Bloomberg’s Economist Says
“Looking forward, we expect production to fall 1% in 3Q from 2Q and register another drop in 4Q, as the economy adjusts to the higher sales tax. Our recession risk model has flashed an early, tentative warning. Our view is that Japan will avoid a recession, though weakness in production increases the risk.”
Yuki Masujima, economist
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- Production fell 4.7% from a year earlier in August, weaker than the -3.9% expected by economists.
- Retail sales gained 4.8% in August from a month earlier, recovering from a weather-related drop the previous month. Economists forecast a 2.4% gain. Sales rose 2% from a year earlier.
--With assistance from Tomoko Sato and Yoshiaki Nohara.
To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jason Clenfield, Paul Jackson
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