Japan's March factory output decline flags risk of GDP contraction

TOKYO (Reuters) - Japan’s industrial output fell in January-March at the fastest pace in almost five years, suggesting the economy may post a mild contraction in the first quarter as manufacturers struggle with the U.S.-Sino trade war.

FILE PHOTO: Employees of Toyota Motor Corp. work on the assembly line of Mirai fuel cell vehicle (FCV) at the company's Motomachi plant in Toyota, Aichi prefecture, Japan May 17, 2018. REUTERS/Issei Kato

However, economists say any decline in Japanese GDP is likely to be temporary as Washington and Beijing edge toward an agreement to end punitive tariffs and China’s economy shows signs of stabilization due to government stimulus.

The sharp decline in Japan’s output highlights the extent of the damage caused by the trade war, but economists are optimistic the world’s third-largest economy can quickly bounce back as global growth remains on relatively firm footing.

“The first quarter looks like a contraction, because output, exports, and business investment are all likely to be weak,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center.

“Still, we already see a turnaround in China, and that will lift manufacturing globally. The worst is already over for Japan, so I would not get pessimistic.”

Industrial output in January-March tumbled 2.6 percent, the biggest decline since April-June 2014, data from the Ministry of Economy, Trade and Industry (METI) showed on Friday. That followed a 1.4 percent expansion in the previous quarter.

On a monthly basis, output fell 0.9 percent in March, more than a median estimate for a 0.1 percent decline in a Reuters poll of economists, and versus a 0.7 percent rise in February.

The mounting pressure on Japan’s economy from weak external demand has hurt exports and threatens corporate profits, which could weigh on capital expenditure in the first quarter, analysts say.

March industrial output fell due to a 3.4 percent decline in car output and a 6.7 percent drop in the production of machines used to make semiconductors and flat-panel displays, the data showed.

In another source of concern, inventories rose 1.6 percent in March, the fastest increase in a year, due to higher inventories of metals, plastics, and heavy equipment.

The rise in inventories suggests makers of these goods could curb output in the future.

Manufacturers surveyed by the ministry expect production to rise 2.7 percent in April and 3.6 percent in May, but a METI official said it downgraded its assessment of output to say it is weakening recently.

Japan’s exports weakened at the start of the year as Washington and Beijing slapped tariffs on each other’s goods in a dispute over the U.S. trade deficit. Japanese companies are exposed because they sell a lot electronic parts and manufacturing equipment to companies in China.

The trade war initially caused China’s economy to wobble, but the world’s second-largest economy defied expectations for a slowdown in the first quarter, raising hope for other countries that rely on Chinese demand. South Korea’s export-reliant economy, however, unexpectedly shrank in the first quarter as companies slashed investment and trade slumped.

Separate data on Friday showed Japan’s retail sales - a key gauge of private consumption that makes up about 60 percent of the economy - rose 1.0 percent in March from a year earlier, more than a 0.8 percent annual gain expected by economists.

Friday’s batch of data comes a day after the Bank of Japan said it would keep interest rates low for at least another year, in a move to dispel uncertainty over its commitment to support the economy and drive inflation.

Japanese policymakers are nervously monitoring developments overseas but have few policy options if weakness in the global economy continues to damage the country’s outlook, some economists say.

Additional data on Friday showed Japan’s jobless rate edged up to 2.5 percent in March from 2.3 percent previously, and job availability held steady at 1.63 per applicant, hovering at a 44-year high.

Tokyo’s core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose an annual 1.3 percent in April from a year earlier, more than the median estimate for a 1.1 percent annual increase.

Editing by Jacqueline Wong