[TOKYO] Japan's government lowered its assessment of industrial output in July as auto makers and electronic parts manufacturers curb output to bring down inventories of finished goods.
Industrial output is flat, the Cabinet Office said in its monthly economic report, which was a downgrade from last month's assessment that factory output is recovering, albeit with some weak spots.
The government left unchanged its overall assessment that the economy is in a gradual recovery phase due to solid consumer spending and capital expenditure plans, but it also highlighted China's slowing economy as a potential risk.
Japan's economic growth is already forecast to slow sharply in the second quarter due partly to inventory adjustments. Most economists expect growth to accelerate again in the current quarter, but lacklustre factory output could cast doubt on the pace of overall growth.
"The breakdown by industry shows transport equipment makers are weak," the Cabinet Office said in the report. "Industrial machinery is recovering, but electronics parts makers are also weak. We hope output recovers after inventory adjustments are over."
Industrial output in May unexpectedly fell at the fastest pace in three months due to declining output of cars, trucks, chemicals and flat-panel displays.
Manufacturers expect their output to rise in June and July, but some economists warn these forecasts tend to be overly optimistic.
Worries are also growing that China's economy is on shaky ground after tighter restrictions on margin trading triggered a panicked sell-off in Chinese shares.
The Cabinet Office stuck with its assessment that consumer spending and the housing market are showing signs of recovery.
Last year consumer spending and housing weakened considerably after the government raised the nationwide sales tax to secure more revenue for healthcare spending.
The government said exports are flat and that the labour market is improving, both unchanged from the previous month.
The government and the Bank of Japan have placed particular emphasis on consumer spending and tight labour demand as a driver of self-sustained economic growth.