Business / Economy

Japan's factory output slipped twice as much as expected in August on slowing overseas demand

by Daniel Leussink

Reuters

Industrial output shrank more than expected in August, the latest warning that the economy and its manufacturers are facing intensifying pressure amid the bitter U.S.-China trade war.

Retail sales, however, expanded at a faster than expected pace, signaling strength in private spending ahead of the consumption tax increase that takes effect Tuesday.

Industrial output fell 1.2 percent in August, government data showed, dropping at a faster pace than the median market forecast for a 0.5 percent decline and almost completely reversing July’s 1.3 percent increase.

Output was weighed down by reduced production of iron and steel products, factory production equipment and cars, offsetting a gain in electronic parts and chemicals, the data showed.

Manufacturers surveyed by the trade ministry expected output to rise 1.9 percent in September but fall 0.5 percent in October.

Monday’s production data paints a bleak picture of Japan’s export-reliant economy, underlining broadening stress across the manufacturing sector from slowing global growth, although service sector activity remains firm as it is less at risk from weakness in global trade.

“The lack of export growth because of the global economic slowdown is having a major impact,” said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute. “The (consumption) tax will be raised in October, so the deceleration of the economy will likely become stronger.”

The ministry cut its assessment of activity on the whole, saying it has been somewhat weakening recently.

The economy has so far avoided buckling under a slowdown in overseas demand, growing for the third straight quarter in April-June largely thanks to robust household consumption and public works spending.

The latest data showed that Japan’s exports slipped for a ninth month in August as the U.S.-China trade war hit demand from China and other Asian trading partners. Exports in volume terms, which strips away exchange rate impacts, also fell.

Prime Minister Shinzo Abe, however, has brought Japanese exporters some relief after signing a limited trade deal with President Donald Trump to cut tariffs on U.S. farm goods, Japanese machine tools and other products.

Although the agreement does not cover autos, Abe said he received assurances from Trump that Washington would not impose previously threatened “Section 232” national security tariffs on Japanese car imports.

Still, even as the threat of higher U.S. tariffs on Japanese car imports was said to have been staved off, policymakers remain worried about the darkening outlook for the economy in light of frail external demand and global recession risks.

Earlier in September, the Bank of Japan signaled the chance of expanding stimulus as early as its October policy meeting, stepping up its rhetoric against threats to the economy from heightened overseas risks.

An upbeat sign in August factory output came from electronic parts production, which expanded for a second straight month, suggesting the global IT cycle could be closer to bottoming out, said Shinkin’s Tsunoda.

“It usually expands for two to three years before getting worse for a year, and it has been contracting since around the fall of last year,” he said.

Separate data Monday showed that domestic demand might be stronger than thought, as retail sales climbed 2 percent in August from a year earlier, reflecting robust spending ahead of the consumption tax increase to 10 percent from 8 percent. The reading was better than a median estimate for a 0.9 percent gain.

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