Business / Economy

Surprise drop in factory output adds to warning signs for Japan's economy

Bloomberg

The nation’s factory output unexpectedly fell in March, the government said Friday, in a sign that gross domestic product is more likely to have shrunk during the first quarter.

Japan needs to see a healthy recovery in exports and industrial output ahead of a long-delayed sales-tax increase set for October. The Bank of Japan again highlighted the risks from the hike again on Thursday, in guidance on interest rates after its policy meeting, pledging to keep rates extremely low through at least spring 2020 in the face of “high uncertainties.”

The nation’s factory output slid 0.9 percent in March from a month earlier, compared with the median estimate of economists of no change, according to data from the trade and industry ministry. Production during the first quarter slid 2.6 percent from the previous three months for the biggest decline in nearly five years.

Separately, core inflation in Tokyo — an early indicator of nationwide prices — accelerated to 1.3 percent in April, the highest in four years. Economists had estimated 1.1 percent. Inflation in Tokyo was expected to have benefited as the prices of food and restaurant meals went up at the start of the new fiscal year on April 1.

Retail sales rose 0.2 percent in March from the previous month, slightly better than expectations from economists for no change, while the jobless rate ticked up to 2.5 percent.

“Key risks to the outlook are U.S. protectionism and political instability in Europe. The former would hurt Japan’s exports that feed into global supply chains, as well as autos,” said Bloomberg economist Yuki Masujima.

The reading on the world’s third-largest economy comes a day after South Korea, seen by some as a bellwether for world trade and technology, surprised markets in reporting its biggest contraction of GDP in a decade — signaling that the worst of the global slowdown may not have passed.

The global slowdown, trade tensions and Japan’s sputtering growth are all contributing to speculation that Prime Minister Shinzo Abe might postpone the tax increase for a third time. The last increase, in 2014, sent consumption into a tailspin, triggering a contraction in the economy.

Meanwhile, Japan is trying to fend off possible U.S. auto tariffs in bilateral trade negotiations with Washington this week. Abe was scheduled to meet U.S. President Donald Trump at the White House on Friday.

The U.S. is pushing to cut its trade deficit with Japan and gain better access to the nation’s agriculture market. Japan is looking for a promise that it won’t be hit by possible U.S. tariffs on autos imports, after Trump last year imposed similar duties on steel and aluminum.

After Friday’s data release, Capital Economics estimated that the Japanese economy would shrink 0.6 percent in the first quarter from the previous three months. “Further ahead, we think that a strong rebound in activity in the second quarter is not on the cards,” Asia economist Darren Aw wrote in a note.

The median of forecasts of economists surveyed by Bloomberg — taken before the factory output data release — had been for GDP to eke out a 0.1 percent gain in the first quarter. Estimates ranged from a 2.1 percent contraction to 2.0 percent growth.

Yet the global economy is still expected to pick up in the second half of the year, BOJ Gov. Haruhiko Kuroda said Thursday, while noting that risks to inflation and the economy were tilted to the downside.