Japan's factory output drops more than expected on slowing overseas demand

JAPAN - TOKYO. Japan's industrial output shrank more than expected in August in the latest warning that the economy and its manufacturers are facing intensifying pressure from a bitter Sino-U.S. trade war.

Retail sales, however, expanded at a faster-than-expected pace, signalling strength in private spending ahead of October's nationwide sales tax increase and Japan's economy minister said the government was ready to support the economy if needed.

Industrial output fell 1.2% in August, government data showed, dropping at a faster pace than a median market forecast for a 0.5% decline and almost completely reversing July's 1.3% 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 expect output to rise 1.9% in September, but fall 0.5% in October.

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Monday's output data paints a bleak picture for Japan's export-reliant economy, underlining broadening stress across the manufacturing sector from slowing global growth, though 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 sales 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 world's third-largest 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 Japan's exports slipped for a ninth month in August as the Sino-U.S. trade war hit demand from China and other Asian trading partners. Exports in volume terms, which strips away the exchange rate impact, also fell.

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

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Although the agreement does not cover autos, Abe said he had 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 staved off, policymakers remain worried about the darkening outlook for the economy in light of frail external demand and global recession risks.

This month, the Bank of Japan signalled the chance of expanding stimulus as early as its October policy meeting by 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 coming 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.

RETAIL SALES RISE

Separate data on Monday showed domestic demand might be stronger than thought, as retail sales climbed 2% in August from a year earlier, the sharpest rise since October last year, according to Refinitiv data.

The reading, which also beat a median estimate for a 0.9% gain, reflected robust spending on the back of a demand surge ahead of a sales tax increase to 10% from 8% on Tuesday, some analysts said.

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Economy Minister Yasutoshi Nishimura said on Monday he would watch the impact of the tax increase and take extra measures to prop up the economy if needed.

"After the consumption tax rate hike, I'll take the initiative to check the economic situation closely and take additional economic measures flexibly, if necessary," Nishimura said in an address to foreign embassies' representatives in Tokyo.

To soften the blow to consumers from the hike, the government has put in place stimulus steps worth 2 trillion yen ($18.5 billion), and will refrain from raising the tax on food and non-alcoholic beverages.

"Tomorrow's tax hike is likely to do less immediate damage to economic growth in Japan than previous increases," said Marcel Thieliant, senior Japan economist at Capital Economics.

"A rapid rebound next year is unlikely."