Japan posts first factory output rise in 3 months but outlook uncertain

A worker walks near a factory at the Keihin industrial zone in Kawasaki, Japan, on Feb 17, 2016.
A worker walks near a factory at the Keihin industrial zone in Kawasaki, Japan, on Feb 17, 2016. PHOTO: REUTERS

TOKYO (AFP) - Japan posted its first factory output expansion in three months, official data showed on Monday (Feb 29), offering some rare good news after a string of weak figures threw cold water on recovery hopes.

The upbeat figures - a 3.7 per cent rise on-month in January - comes as investors look for clues about the state of the world's number three economy, as disappointing inflation figures last week stirred speculation the Bank of Japan will have to unleash more monetary easing to boost growth.

Japanese businesses have remained cautious over investing in their businesses and offering significant wage increases, citing the uncertain outlook.

The once-powerhouse economy contracted in the last quarter of 2015, and the bad news stretched into January when Japan swung back into a trade deficit as exports to key market China plunged.

That was Japan's second quarterly contraction in 2015, and dealt another blow to Prime Minister Shinzo Abe's bid to slay deflation and kick-start the economy, dubbed Abenomics.

Analysts said the positive industrial production figures may not last.

"The rebound in industrial production in January is unlikely to assuage concerns about the health of Japan's economy as firms are predicting a renewed slump in February," Marcel Thieliant from research house Capital Economics said in a commentary.

"This jump in activity should be reversed soon."

Last month, central bank policymakers shocked markets with an unprecedented negative interest rate policy, which aims to boost lending by penalising banks for storing excess reserves in the BOJ's vaults. But the move was widely panned as a desperate bid to counter the slowdown.

As his growth programme limps along and the BOJ struggles to hit an ambitious two-percent inflation target, Mr Abe must decide whether to follow through with another sales tax hike next year.

The hike is seen as crucial to containing Japan's massive national debt but it could dent consumer spending and hurt an already fragile economy.

A consumption tax hike in 2014 pushed Japan into a brief recession.

Mr Abe's programme was also shaken by the bloodbath on equity markets at the start of the year and a resurgent yen which threatened to dent companies' profits.