Japan’s manufacturing output falls as US tariffs bite, inflation slows

TOKYO – Japan’s factory output slumped in July as US tariffs bite and a leading indicator of nationwide inflation slowed, data showed on Aug 29, complicating the central bank’s decision on the next rate hike timing.

While Japan’s jobless rate hit a multi-year low in July due to a tight job market, retail sales rose much less than expected in a sign that rising living costs were weighing on consumption.

Signs of persistent inflationary pressure and downside risks to growth highlight the challenge the Bank of Japan (BOJ) faces in determining how soon to resume interest rate hikes.

“Sticky inflation is eroding wage gains, keeping consumer spending weak,” said Dr Stefan Angrick, head of Japan and frontier market economics at Moody’s Analytics.

“The poor run of data will keep the Bank of Japan on hold until the year’s end. Japan’s manufacturers will stay stuck in the doldrums, with few clear sources of support.”

Factory output fell 1.6 per cent in July from the previous month, government data showed, more than a median market forecast for a 1 per cent drop, due partly to a 6.7 per cent decline in automobile production.

Manufacturers surveyed by the government expect output to grow 2.8 per cent in August before dipping 0.3 per cent in September.

While the bilateral trade agreement in July is likely to lower US tariffs on Japanese cars to 15 per cent, there is uncertainty on when the cut will apply as President Donald Trump has yet to sign an executive order.

Complicating the BOJ’s policy, stubbornly high food prices have kept inflation in capital city Tokyo – seen as a leading indicator of nationwide trends – above its 2 per cent target.

The Tokyo core consumer price index, which excludes volatile fresh food prices but includes fuel costs, rose 2.5 per cent in August from a year earlier, matching a median market forecast.

It slowed from a 2.9 per cent rise in July, due largely to government fuel subsidies that pushed down utility bills.

But food inflation, excluding the cost of fresh food items like vegetables, hit 7.4 per cent, steady from the previous month, reflecting stubbornly high prices of rice, coffee beans and other groceries.

An index that strips out both volatile fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of underlying inflation, rose 3 per cent in August from a year earlier after a 3.1 per cent gain in July.

The data will be among factors the BOJ will scrutinise at its next policy meeting on Sept 18 to 19.

Separate data showed that retail sales rose just 0.3 per cent in July from a year earlier, confounding market expectations for a 1.8 per cent rise in a sign that the rising cost of living was hurting consumption. REUTERS