Business / Economy

October's 4.2% output drop poses risk of steeper economic slide in Japan

Bloomberg

Industrial production fell more than expected in October, signaling the possibility of a steeper contraction in economic growth ahead and raising the case for a bigger government stimulus package.

The global slowdown, a consumption tax hike and a damaging typhoon contributed to a 4.2 percent slide in factory output from the previous month, matching the nation’s worst drop in the past 5½ years and falling more than twice as much as economists forecasted, data from the economy ministry showed Friday.

The steep drop, following declines in retail sales and exports, comes as the government mulls stimulus measures to help the economy cope with typhoon damage, weak external demand and the hit to consumers from the tax hike.

More fiscal stimulus would be good news for the Bank of Japan, which has appeared reluctant to ramp up its own massive stimulus program, which is testing the limits of effectiveness.

Economists have been surprised at the extent to which October’s storm hurt economic indicators. But weak production forecasts for the rest of the quarter suggest a weaker underlying trend following the 2-point tax hike that took effect the same month.

“We must be ready for a big contraction this quarter,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “It won’t be a surprise if growth is worse than the market consensus.”

Economists have forecast GDP will shrink 2.7 percent this quarter — much less than the 7.3 percent contraction that followed a previous tax hike in 2014, thanks to tax breaks designed to support spending.

“Factories cut back on production after the sales tax and the typhoon also had an impact,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “This makes it easier to call for a large stimulus package.”

“Our basic view is that Japan’s growth would slow as a result of weakening external demand pressuring exports. This is playing out, but the trajectory is a little weaker than anticipated. All this adds up to a greater need for fiscal support, given the Bank of Japan’s hands look mostly tied.”

Friday’s production report shows manufacturers expect to cut output 1.5 percent in November.

The jobless rate was at 2.4 percent in October, matching economists’ forecasts and hovering just above a multidecade low, data from the ministry of internal affairs showed.

The job-to-applicant ratio held steady at 1.57 in October, meaning there were 157 jobs available for every 100 applicants. The measure was at a 45-year high of 1.63 in April.

A separate report Friday showed Tokyo’s core consumer prices, a leading indicator of nationwide price trends, rose 0.6 percent in November, matching the median forecast of economists.

Stripping out both fresh food and energy for a core-core reading, Tokyo’s consumer prices rose 0.7 percent, also matching the forecast.