Japan’s industrial production fell in February, undercutting economists’ forecasts, as the first sales tax hike since 1997 risks stalling the economic recovery.
Output fell 2.3 percent from the previous month, the steepest drop in eight months, the Ministry of Economy, Trade and Industry said Monday. The median estimate of 28 economists was for a 0.3 percent gain. A separate gauge of manufacturing fell in March for a second straight month.
While the weakness partly reflected disruptions from heavy snowfall, the data showed manufacturers are bracing for a slump in demand following Tuesday’s sales tax increase. Inventories fell for a seventh straight month, lessening the likelihood of even sharper output cuts as the higher consumption levy pushes the economy into a one-quarter contraction in April-June.
“Companies are already cutting production and managing their inventory well, so the fall-off in the second quarter should be modest,” said Kiichi Murashima, chief economist at Citigroup Inc. in Tokyo.
The 3-point increase in the consumption tax is forecast to cause an annualized 3.5 percent shrinkage in the economy in the second quarter, before rebounding to grow 2.1 percent in the third, according to a separate Bloomberg survey.
Prime Minister Shinzo Abe gave the go-ahead for the tax increase to help deal with the world’s biggest debt burden, even as he pushes reflationary policies to spur growth and end 15 years of deflation.
Finance Minister Taro Aso last week outlined plans to front-load spending in next fiscal year’s budget to help the economy weather the blow from the higher levy. The Bank of Japan has also signaled it is ready to boost record easing if needed to drive inflation toward its 2 percent target.
A survey of manufacturers by METI pointed to a sluggish rebound following February’s decline. Companies plan to boost production by 0.9 percent in March and cut it by 0.6 percent in April, the ministry said.
Manufacturers appear to be more resilient now than in 1997, when a sales tax increase precipitated a tumble in production that developed into a recession.
Companies are making long-term demand projections and keeping production and inventory under control before the higher levy takes effect, Yasushi Ishizuka, director of the economic analysis office in METI’s research and statistics department, said after the release.
“They’ve told us they’ve learned their lesson,” Ishizuka said. “The projections are limited to a smaller decline compared to the drop in production when the sales tax was last increased.”
The seasonally adjusted index of inventories was at 103.8 in February, compared with 124.1 in March 1997, METI data show. Output fell 2.6 percent in April 1997.
A purchasing managers’ index showed slowing expansion in the manufacturing sector in March, with the gauge compiled by Markit Economics and Japan Materials Management Association falling to 53.9 in March from 55.5 in February. A reading above 50 indicates expansion.
“The BOJ is under pressure from the markets and politicians to ease further,” said Masamichi Adachi, a senior economist at JPMorgan Chase and Co. in Tokyo.
Production forecasts of economists polled by Bloomberg ranged from a 1.2 percent increase to a 1.5 percent decline in February.
At least 20 cm of snow fell in Tokyo on Feb. 14 and 15, with accumulations 10 times higher in some other parts tof the nation. The previous weekend brought the heaviest snowfall in Tokyo in 45 years.
Toyota Motor Corp., Honda Motor Co. and Suzuki Motor Corp. suspended output in some factories in Japan in February after the snowstorms disrupted shipments of parts from suppliers. Panasonic Corp. said it experienced a supply-chain bottleneck due to the snow.
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