Consumer prices slid at a faster pace in July and industrial production unexpectedly slumped, raising the danger that the world’s third-largest economy has slipped back into a contraction.
The benchmark price gauge, which excludes fresh food, fell 0.3 percent in July from a year before, putting the central bank’s 1 percent inflation goal farther from reach, a government report said Friday.
Separate government data also showed the same day that industrial output fell 1.2 percent. A private measure of manufacturing for August was the lowest since the March 2011 disasters.
Friday’s releases reflect diminishing demand overseas for the nation’s exports amid the European debt crisis and exchange-rate appreciation, and the end of green incentives for vehicle purchases. With Prime Minister Yoshihiko Noda’s government Friday predicting it will miss a deficit-reduction target, pressure may rise on the Bank of Japan to expand stimulus and sustain the recovery.
“The risk of a contraction in the second half of the year is increasing,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who previously worked at the central bank. “The downside risks on the economy are increasing, and could push the BOJ to further expand its asset-purchase program next month.”
The slide in output was led by declines in the electronic components sector, with production of integrated circuits for mobile phones and video game consoles in Asia declining, the government said. The trade ministry’s assessment that production is “flat” remained unchanged from last month.
“The most shocking data were on production,” said Norio Miyagawa, a senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. The central bank may need to bolster stimulus as the economy faces a deeper-than-expected slowdown, Miyagawa said.
Japan’s weakening accompanies signs of slowing across Asia, the region that’s led the global rebound from the 2007-2009 credit crunch. South Korea reported Friday a 1.6 percent drop in industrial production in July from the previous month, after a 0.6 percent decline in June.
The economic deterioration adds to challenges facing Noda, who is under pressure from the largest opposition party to follow through on a pledge to hold an early election, and whose party holds a leadership contest next month. The government this week downgraded its economic assessment for the first time in 10 months, citing weakness in global demand a week after a report showed exports fell the most in six months in July.
The 1.2 percent decline in industrial output in July compared with the median estimate for a 1.7 percent gain in a Bloomberg survey of 27 economists.
“We will have to revise down our GDP forecast for the third quarter” based on Friday’s data, said Nishioka at RBS, who had previously seen a 2.1 percent annualized expansion. JPMorgan Chase & Co. and BNP Paribas SA are among banks that had predicted a drop in GDP even before Friday’s figures.
A decline in oil prices from a year earlier was the main reason for the weaker consumer-price reading, Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, wrote in a report before Friday’s release. Japan has increased reliance on fossil-fuel imports after idling most of its nuclear power after the Fukushima reactor meltdowns.
Currency strength, spurred by Japan’s status as a default haven from global market turmoil because it is the world’s largest net creditor, also has toughened the BOJ’s job of defeating the deflation that became entrenched in the late 1990s. Exchange-rate gains cut the cost of imports.
The yen slid as much as 8.8 percent against the dollar in the weeks after the BOJ shocked markets in February by announcing a 1 percent inflation target and expanding its asset-buying fund.