Japan’s industrial output falls, clouding recovery outlook

Japan’s factory output dropped in June, adding to signs that the economy is struggling to recover from a contraction earlier in 2024.

Industrial production declined 3.6 per cent from May led by automakers and production machinery makers, the Industry Ministry reported on July 31. That compared with the consensus estimate of a 4.5 per cent drop.

Output fell 7.3 per cent from a year ago, but gained 2.9 per cent in the three months through June from the previous period, suggesting it provided some support to the economy last quarter.

Separately, retail sales rose 0.6 per cent in June from May, while they gained 3.7 per cent from a year ago. 

The production of cars and auto parts drove the reading lower as an ongoing scandal involving Japan’s large carmakers such as Toyota Motor continues to disrupt output.

Toyota is extending its suspension of production of three models, following a government probe into its faulty vehicle certifications. Still, solid exports signal that global demand remains relatively strong, offering some support for Japan’s production.

“The impact of the auto scandal drove down production in June, which I think is a temporary factor,” said Daiwa Securities chief economist Toru Suehiro.

“Given production rose on a quarterly basis, output will contribute to GDP (gross domestic product) positively. But at the same time, I’m not expecting production to gain a lot of momentum from here.”

The lacklustre output result dims hopes that the economy will stage a recovery in the three months through June, with consumption also remaining weak.

Analysts expect the economy to rebound moderately in the second quarter after contracting in the first three months of 2024. 

Retail sales are likely to have been inflated by ongoing price hikes, and a question remains over whether wage gains will help consumers accept inflation.

Still, department store sales jumped 13.5 per cent from the previous year, with operators benefiting from increased spending by wealthier shoppers despite the inflationary environment, while others look for lower prices for their daily necessities.

The July 31 data comes as the Bank of Japan (BOJ) concludes its two-day policy meeting later in the day. Analysts are split over

whether the BOJ will raise interest rates

this time or opt to wait for more economic data to see if demand driven inflation is taking root in Japan.

BOJ officials see weakness in consumer spending complicating their decision over whether to raise interest rates, according to people familiar with the matter.

“We are likely to see the economy return to expansion in the second quarter after poor results in the previous period,” said Daiwa’s Mr Suehiro. “Given that, if the BOJ raises interest rates today, it won’t be criticised immediately about such a move.” BLOOMBERG