March 29, 2019 / 12:03 AM / 2 months ago

Weak rebound in Japan factory output leaves economy in fragile state

TOKYO (Reuters) - Japan’s factory output expanded for the first time in four months in February, though the rebound was relatively weak and the overall outlook for the sector and businesses suggested a record postwar economic growth phase may be coming to an end.

FILE PHOTO: A worker walks near a factory at the Keihin industrial zone in Kawasaki, Japan, March 8, 2017. REUTERS/Toru Hanai/

The rising pressure on the economy was further underlined by a soft outcome for retail sales, meaning Japan’s recovery is showing signs of falling prey to both slackening domestic and external demand.

Data by the Ministry of Economy, Trade and Industry (METI) showed factory output rose 1.4 percent, led by production of cars and semiconductor production equipment, topping a 1.0 percent increase seen in a Reuters poll of economists. However, it barely recouped a revised 3.4 percent slump seen in January.

Separate data showed retail sales - a key gauge of private consumption that makes up about 60 percent of the economy - rose just 0.4 percent, below a 1.2 percent gain seen by economists and slowing from January.

Manufacturers surveyed by the ministry expect production to rise 1.3 percent in March and 1.1 percent in April. Still, even if the forecasts materialized, the first-quarter production would undershoot the previous three months, officials said, describing the rebound as “not strong enough”.

“Allowing for the usual upward bias in those projections, they point to broadly flat output over the next two months. That means that industrial production may have plunged by around 3 percent in the first quarter,” said Marcel Thieliant, senior Japan economist at Capital Economics.

“We still expect consumer spending to rise a bit in the first quarter. But that won’t offset a drag from net trade and falling investment spending.”

He predicted the economy would contract 0.4 percent quarter-on-quarter in January-March, and stagnate over 2019.

The growing strains on businesses and consumers could bring an end to Japan’s longest post-war economic expansion, as the effects of prime minister Shinzo Abe’s stimulus policies wane.

STAGNATING

Friday’s batch of data follows a recent series of weak indicators, including exports and a leading gauge of capital expenditure, raising the risk of a sharp downturn for the world’s third-largest economy.

The mounting pressure on the economy from weak external demand has put a dent on exports and threatens corporate profits, which could weigh on wages and blunt households of their purchasing power, analysts say.

METI described on Friday industrial output as “stalling”, keeping its assessment unchanged from the previous month.

The Sino-U.S. trade war has also had a negative effect on domestic growth, as a slowing Chinese economy curbed demand for mobile phone parts and chip-making equipment from Japan. Uncertainty over Britain’s exit from the European Union and jittery global financial markets have added to a growing list of worries for policymakers.

The government this month cut its assessment on Japan’s economy for the first time in three years, and the Bank of Japan cut its view on exports and factory output, although both stuck to the view that the economy remained in moderate recovery.

Yet, persistent weakness in exports and factory output could pile pressure on Abe to put off a planned sales tax hike to 10 percent from the current 8 percent in October. The Bank of Japan may also come under pressure to tap its depleted arsenal for further easing.

The BOJ’s closely-watched “tankan” survey is expected to show big manufacturers’ sentiment falling to a two-year low in the January-March quarter, with big firms likely to cut their capital spending in fiscal 2019, a Reuters poll showed.

Separate data out Friday showed inflation struggling to accelerate despite a tight labor market.

Tokyo’s core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 1.1 percent in March from a year earlier, holding steady since January 2019.

Japan’s jobless rate stood at 2.3 percent in February and the job availability held steady at 1.63 per applicant, hovering at 44-year high.

Reporting by Tetsushi Kajimoto; Editing by Shri Navaratnam

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