Japan growth outlook dims as factory output contracts

TOKYO — Japan’s factory output unexpectedly fell in February at the fastest pace in eight months, leaving the economy in a precarious position as an impending sales tax hike threatens to choke consumption and undermine the government’s revival plan.

Analysts said that with the national sales tax rising today to 8 per cent from 5 per cent, the Bank of Japan (BoJ) would probably need to inject more stimulus to safeguard a recovery amid a recent loss of momentum.

Ministry of Economy, Trade and Industry (METI) data showed that industrial output in February fell 2.3 per cent from the previous month, versus a 0.3 per cent rise forecast by economists in a Reuters poll. This followed a solid 3.8 per cent gain in January, which was driven by brisk production of cars and household appliances.

Manufacturers surveyed by the ministry expect output to have risen 0.9 per cent last month but decrease 0.6 per cent this month, the METI said, shrugging off February’s weak reading as a one-off factor due to unusually heavy snow that disrupted factory activity.

Still, analysts said the outlook for the economy remained challenging at best, noting a recent string of soft data and a separate survey yesterday that showed manufacturing activity grew at a slower pace last month.

“Companies are curbing production to keep inventories low as they are worried about demand after the sales tax hike,” said Mr Norio Miyagawa, Senior Economist at Mizuho Securities Research and Consulting. “This suggests the economy may not rebound quickly and the burden may fall on the BoJ, as the government has committed to fiscal stimulus spending.”

Japan’s economy sped past those of other developed countries in the first half of last year, spurred by Tokyo’s aggressive fiscal and monetary stimulus, but it has since slowed steadily as exports and capital spending lagged.

With the data indicating that the benefits of last-minute demand before the tax hike have probably run their course, external demand may need to pick up some of the slack.

“While capital spending is likely to underpin economic activity ahead, external demand, particularly China, poses a risk to the Japanese economy,” said Mr Naoki Iizuka, an economist at Citigroup Global Markets Japan.

In China, worries of a sharp slowdown have stoked speculation that Beijing would launch stimulus measures to bolster growth.

But while a consumption boost is expected to have supported growth in the first quarter, the economy is expected to contract in the April-to-June quarter, as consumer spending dips after the sales tax hike. Many analysts are counting on the BoJ to keep the economy on an even keel, and a rebound that is expected in the third quarter looks increasingly dependent on the central bank’s largesse. REUTERS