Japan’s factory output slides unexpectedly, risks of recession rising

Japan's factory output unexpectedly fell for the second straight month in August, fuelling worries the economy is slipping back into recession and raising more doubts about whether the government can reignite growth and end decades of deflation.

As a slowdown in China chills global growth, hitting export-reliant Asia particularly hard, analysts say the Bank of Japan may be forced to offer fresh stimulus as early as next month in a bid to get the faltering economy back on track.

"In the absence of growth engines due to weakness in external and domestic demand, the possibility is growing that the economy has shrunk for a second straight quarter in July-September and it may be slipping into a recession," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

"Given weakening of the economy, the BOJ could ease policy again next month, even though Governor (Haruhiko) Kuroda remains bullish and the government is wary about further yen weakening boosting the cost of imports."

The economy shrank an annualised 1.2 per cent in April-June.

August factory output fell 0.5 per cent month-on-month, trade ministry data showed on Wednesday, short of a 1.0 per cent increase expected by analysts.

Not surprisingly, exporting industries led the decline. These included general-purpose machinery, cars and China-bound auto parts.

The cooling China economy has been adding to global deflationary pressures in the form of crumbling commodity and oil prices.

The Bank of Japan has been pumping billions of dollars into the economy to spark inflation towards its 2 per cent goal by September 2016, and has remained adamant that prices will move up over time despite faltering external and domestic demand.

However, few - if any - investors expect the target to be reached as a renewed drop in oil costs saw prices fall for the first time since the BOJ deployed its massive asset purchases more than two years ago.

'Abenomics' under fire

The weak indicators have rekindled doubts about Prime Minister Shinzo Abe's 'Abenomics' strategy of reviving growth through fiscal expansion, monetary stimulus and structural reforms.

Speaking in New York at a news conference on Tuesday, Abe said: "We have come to the point where a bit more effort is required," to pull the world's third-biggest economy out of deflation.

The outlook for businesses also looked grim, with the trade ministry cutting its assessment of industrial output, saying it is weakening. Manufacturers surveyed by the trade ministry expect output to rise just 0.1 per cent in September before bouncing 4.4 per cent in October.

Separate data showed consumer spending also remained fragile, with retail sales up just 0.8 per cent in August from a year earlier, slowing markedly from 1.8 percent growth in July.

The BOJ will scrutinise a batch of data - including its key tankan survey due on Thursday and household spending out Friday - at its policy review next week.

It has already pumped ¥180 trillion ($1.50 trillion) into the economy since launching a massive stimulus programme in April 2013, and each month gobbles up government bonds equivalent to about 1 per cent of Japan's GDP.

Analysts say the central bank won't be able to stay its hand for too much longer.

"Additional easing by the Bank of Japan next month looks all but inevitable," said Marcel Thieliant, economist at Capital Economics.

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