Japan factory output ticks up in June but Q2 GDP contraction still eyed

Japan's central bank this month cut its annual growth and inflation forecasts for the economy.
Japan's central bank this month cut its annual growth and inflation forecasts for the economy. PHOTO: REUTERS

TOKYO (AFP) - Japan's factory output turned positive in June, reversing a decline from the previous month, official data showed Thursday, but the world's number-three economy was still struggling to cement a recovery.

The industry ministry said industrial production expanded a better-than-expected 0.8 per cent, beating a median forecast for a rise of 0.3 per cent in a survey of economists by Bloomberg News.

It also reversed 2.1 per cent decline in May.

An industry ministry survey of manufacturers' output projections showed they expect a 0.5 per cent expansion in July and 2.7 perc ent rise in August.

The relatively upbeat figures come after separate data releases last week showed Japan's trade deficit narrowed sharply last month as exports of automobiles and electronic parts picked up while a sky-high energy import bill continued to fall.

Japan's central bank this month cut its annual growth and inflation forecasts for the economy, with analysts warning weaknesses remained and the downgrade hinted at a disappointing second quarter.

The economy expanded 1.0 per cent in January-March after limping out of recession in the last three months of 2014, and business confidence remains strong.

A sales tax hike last year hammered consumer spending and briefly sent the economy into the red.

Despite signs of improvement, economists said the June production data did little to allay concerns that economic growth turned negative again in the second quarter.

"We stick to our view that the economy shrank last quarter," Marcel Thieliant from Capital Economics said in a commentary.

He also cautioned over firms' production forecasts that pointed to a rebound in third-quarter activity.

"Companies tend to be too optimistic about future production levels: Over the past seven years, they have predicted an average rise in output of 1.6 per cent in the month ahead, but activity has been little changed during this period.

"We therefore believe that output will not recover as strongly as firms expect in coming months," MR Thieliant added.

Economists at SMBC Nikko Securities said: "Compared with the sharp drop in the previous month, the (June) rise was limited, giving a sense of stagnation."

A slump in demand from the United States, China and natural resources-rich countries has dented Japan's key manufacturers - automobile, machinery and electronics makers, they said.

But SMBC was more upbeat on domestic demand, saying it was mounting a recovery which would lend some support to the nation's factories.

With exports are also likely to pick up gradually, SMBC Nikko said Japan's economy will likely return to growth in the July-September quarter even if it contracted in April-June.