TOKYO (Reuters) - Japan’s factory output posted the biggest decline in a year in January in a sign slowing Chinese demand and the Sino-U.S. trade war were taking a toll on the country’s manufacturing sector, a major driver of economic growth.
Adding to the gloom, retail sales in January fell short of economists’ forecast, slowing sharply from the previous month and dashing hopes that domestic demand may offset weakening external demand.
The batch of weak data reinforces policymakers’ concerns that sluggish output will hit growth in the world’s third-largest economy, with exporters curbing shipments and manufacturers halting production as the Sino-U.S. tariff war hits trade with China.
“Weak demand was the main factor behind January’s big drop. It is highly likely that output will drop in the first quarter,” said Koya Miyamae, senior economist at SMBC Nikko Securities.
“The outlook will depend greatly on external demand, although manufacturers have so far not faced a situation in which they are forced into cutting production to adjust inventory.”
The 3.7 percent fall in output, which closely tracks broader economic growth, was bigger than the median market forecast for a 2.5 percent drop and marked the third straight month of contraction, the data showed on Thursday.
Japan also faces a bumpy road ahead with manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) in the report expecting output to rebound 5.0 percent in February but decrease 1.6 percent in March.
Sharp drops in output of cars, electrical and production machinery, electronics parts and devices dragged down overall activity, a ministry official said, adding that a significant rebound is not expected for the time being.
The ministry cut its assessment of activity to say it was “stalling”. Previously, it was described as picking up gradually.
Japan’s economy rebounded in the fourth quarter as business and consumer spending recovered from the slump caused by natural disasters, but trade frictions and a planned sales tax hike in October have stoked fears of a recession this year.
Underscoring fragile domestic demand, separate data showed on Thursday retail sales grew just 0.6 percent year-on-year in January, dragged down by sluggish sales at department stores and online retailers and of items like food, beverages and clothing.
The figure compared with economists’ median estimate for a 1.1 percent rise, slowing sharply from a 1.3 percent gain in December.
On the seasonally-adjusted basis, retail sales dropped 2.3 percent month-on-month in January, a worrying sign for private consumption, which accounts for about 60 percent of the economy.
Data released last week also showed Japan’s exports logged their worst drop in more than two years in January as China-bound shipments tumbled, fuelling concerns about a potential fallout from the Sino-U.S. trade war.
U.S. President Donald Trump said earlier this week he may soon sign a deal to end a trade war with Chinese President Xi Jinping if their countries can bridge remaining differences.
Trump has delayed an increase in U.S. tariffs on $200 billion of Chinese goods and extended his March 1 deadline for a deal. That decision helped avert another escalation in the trade war between the world’s two largest economies that has cost both countries billions of dollars and roiled global markets.
Reporting by Tetsushi Kajimoto; Editing by Sam Holmes