Japan factory output falls as global slowdown keeps biting

[TOKYO] Japan's factory production dropped in August amid a global slowdown that's battered exports leaving the economy vulnerable as a sales tax hike taking effect this week threatens to crimp domestic demand.

Production fell 1.2 per cent from a month earlier, declining for a second time in three months, the trade ministry said Monday. Economists had forecast a 0.5 per cent drop. Separately, retail sales rebounded in August after a prolonged rainy season that had deterred shoppers in previous months.

Slowing demand overseas, especially in China, has weighed on Japanese exports and factory production this year. It's also made the economy more dependent on consumer spending, which is likely to take a hit from the sales tax hike that goes into effect Tuesday.

The Bank of Japan this month said it's looking carefully at whether overseas developments also have the potential to squelch inflation, raising expectations for more stimulus at the BOJ's October meeting.

Tuesday's Tankan survey will offer another read on the health of the industrial sector. The survey is forecast to show large manufacturers are the least optimistic they've been since 2013.

Still, there are some signs the tech sector may be over the worst. BOJ Governor Haruhiko Kuroda said he sees a rebound in the global IT cycle and a recovery in memory chip prices suggests he may be right.

Yuki Masujima, a Bloomberg economist, said: "Japan's economy is losing momentum. Our recession risk model has flashed an early, tentative warning."

Production fell 4.7 per cent from a year earlier in August, weaker than the -3.9 per cent expected by economists.

Retail sales gained 4.8 per cent in August from a month earlier, recovering from a weather-related drop the previous month. Economists forecast a 2.4 per cent gain. Sales rose 2 per cent from a year earlier.

BLOOMBERG