September 28, 2012 / 3:05 AM / 7 years ago

Japan factory output hits 15-month low, raises risk of recession

TOKYO (Reuters) - Japan’s industrial output fell to a 15-month low in August, hit by sagging sales in its top export market China and confidence-sapping euro zone crisis, fuelling concerns that the world’s third-largest economy could slip into recession later this year.

A worker is seen at a factory in Keihin industrial zone in Kawasaki, south of Tokyo May 31, 2011. REUTERS/Toru Hanai

Japan has so far outperformed most of its peers in the Group of Seven helped by rebuilding from last year’s earthquake and tsunami, but with that effect fading domestic demand is no longer strong enough to make up for falling exports.

Industrial output fell 1.3 percent in August dragged down by cuts in production of electronics parts and cars. The fall was deeper than a 0.5 percent drop expected by economists, marking a second consecutive decline after a 1.0 percent drop in July, government data showed. JPIP1=ECI

“The slowdown in exports is greater than previously thought. On top of that, anti-Japan demonstrations and boycott of Japanese goods in China will have an impact on corporate output plans,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

“There is a chance that our economic growth forecast for Japan will be downgraded. And the possibility has certainly increased for Japan to enter a recession,” he added.

In a sign of more pain to come, manufacturers surveyed by the Ministry of Economy, Trade and Industry predicted output to fall 2.9 percent in September and merely stabilize in October. That would spell a second straight quarter of declines raising the likelihood that the economy as a whole could contract in the July-September quarter.

Commenting on the data, the ministry said the level of output was the lowest since May 2011 and cut its assessment to say industrial production was now in a weakening trend. Previously it said output had stabilized.

The Bank of Japan eased policy last week by boosting bond purchases and warned economic recovery predicted for the latter part of this year could get pushed back by six months.

One of the BOJ’s policymakers told Reuters this week the central bank was ready to act again if a risk arose that the economy would underperform despite this month’s stimulus.

The purchasing managers index for September showed manufacturing activity had shrunk for four straight months, suggesting that industrial output could fall in July-September.

DEFLATION

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 48.0 in September from 47.7 in August, in a tentative sign that weak overseas demand may have stabilized. Still, the data showed that activity has contracted for four straight months. JPRPMI=ECI

Highlighting persistent deflation which has plagued Japan much of the past decade, the core consumer price index fell 0.3 percent in the year to August, more than expected, separate data showed. Overall consumer prices fell 0.4 percent.

The drop in the core index, which includes oil products but excludes volatile prices of fresh fruit, vegetables and seafood, compared with a 0.2 percent fall expected by economists.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell an annual 0.5 percent in August, data from the internal affairs ministry showed. JPIP1=ECI

Faced with pressure for bolder action, the BOJ set a 1 percent inflation target in February and boosted asset purchases so far three times this year, each time adding 10 trillion yen ($128.6 billion) to its monetary stimulus.

But with the end of deflation still not in sight the BOJ remains under pressure to keep pumping funds into the economy.

Japan’s growth slowed to 0.2 percent in April-June from 1.3 percent in January-March and analysts expect it could stall for the rest of 2012 as stimulus-driven spending on such items as subsidized low-emission cars fades, reconstruction-related demand wanes and exports struggle.

($1 = 77.7800 Japanese yen)

Additional reporting by Stanley White; Editing by Tomasz Janowski and Jacqueline Wong

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