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 to its lowest level in about 26 years.
Industrial production dropped 3.6 percent 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 percent points to resilience at home that has helped prop up overall economic growth so far.
With trade tensions and a global economic slowdown weighing on exports, domestic demand has become a vital prop for the economy. While capital spending and consumption kept the economy growing through the start of the year, the consumption tax increase planned for October could transform that dynamic if it hits domestic demand.
The latest figures strengthen the likelihood that the economy contracted in the second quarter. Economists surveyed by Bloomberg earlier in July expect the economy to shrink 0.1 percent.
Production of passenger cars and engines was down, along with desktop computers and equipment to manufacture display panels used in smartphones and TVs.
The weak data came amid concerns that a slowdown in the Chinese economy and the trade war between the United States and China is beginning to weigh on Japanese exporters.
Top U.S. and Chinese officials were scheduled to meet in Shanghai on Tuesday to restart negotiations for a deal, though Koya Miyamae, senior economist at SMBC Nikko Securities Inc., said he expects business sentiment to remain tepid for the time being.
Based on a poll of manufacturers, however, the ministry expects output to climb 2.7 percent in July and 0.6 percent in August.
The index of industrial shipments fell 3.3 percent to 100.6 while that of inventories was up 0.3 percent at 104.6.
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 Tokyo and Seoul could also take a toll on Japan, though South 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.
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