TOKYO (Reuters) - Japan’s industrial output fell faster in May than at any time since the devastating earthquake of March 2011 while inventories hit their highest in almost a year, suggesting a nascent economic recovery may stall before it gets properly started.
Household spending also fell in May, leaving the Bank of Japan’s 2 percent target seemingly out of reach. Energy costs were the sole driver of what little inflation there is, further underscoring the fragile nature of Japan’s recovery.
Recent declines in oil costs and stubbornly slow wage growth could further cloud the outlook and force the BOJ next month to cut its rosy inflation projections yet again, analysts say.
“Production looks like it will enter a period of stagnation,” said Hiroaki Muto, an economist at Tokai Tokyo Research Center, “If production is weak, consumer spending is unlikely to strengthen. The BOJ may have to lower its consumer price forecasts.”
Industrial output fell by a larger-than-expected 3.3 percent in May as the makers of cars and construction machinery cut output because of high inventories, trade ministry data showed on Friday.
While manufacturers’ forecasts for June suggest that output will rise by 2 percent or more in April-June, output could peak after the current quarter because some manufacturers of capital goods are ordering fewer parts from overseas, a trade ministry official told reporters.
A downturn in output would be bad news for Japanese policymakers, who have pinned their hopes on strong overseas demand boosting corporate profits, wages and eventually consumption.
Core consumer prices, which includes oil products but excludes fresh food prices, rose 0.4 percent in May from a year earlier, marking the fifth straight month of gains and accelerating from a 0.3 percent increase in April.
But after stripping out the effect of energy costs, consumer inflation was unchanged in May from a year earlier.
Core consumer prices in Tokyo, available a month before the nationwide data, were unchanged in June from a year earlier, against a 0.2 percent gain projected in a Reuters poll.
“The BOJ argues that trend inflation is improving due to a strong economy. But that’s not happening,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
“It just shows how companies, knowing consumers are very sensitive to prices, are reluctant to raise prices.”
Separate data showed household spending dipped 0.1 percent in May from a year earlier to mark a 15th straight month of declines - the longest falling streak on record.
Such weak spending reflects slow wage growth, despite a continued tightening in the job market, analysts say.
Japan’s jobless rate unexpectedly rose to 3.1 percent in May as more workers resigned to seek better jobs and new entrants joined the labor market.
Job availability rose for the third straight month in May to reach 1.4 jobs per applicant, its highest since February 1974, data from the Internal Affairs Ministry showed, suggesting an ongoing mismatch between the jobs on offer and the jobs workers either want or are qualified to do.
Japan’s economy expanded at an annualized 1.0 percent in the first quarter on robust exports and a boost from consumption, prompting the BOJ to upgrade its economic assessment in April.
But consumer inflation remains subdued, underscoring the challenge for the BOJ in driving up inflation to its target.
The BOJ is set to upgrade its economic assessment again but cut its inflation forecast at a quarterly review of its projections in July, sources have told Reuters.
Reporting by Leika Kihara and Stanley White; Editing by Eric Meijer