Japan factory output falls in sign of frailty before tariffs
Authorities have indicated they need more time to gauge the impact of the tariffs, and BOJ watchers have pushed back their expected time frames for another rate hike in light of the ambiguity
[TOKYO] Japan’s factory output fell last month, indicating flagging momentum for manufacturers as they coped with uncertainties surrounding US President Donald Trump’s sweeping tariff campaign.
Industrial production dropped 1.1 per cent in March compared with the previous month, the industry ministry reported on Wednesday (Apr 30). Economists had forecast a 0.4 per cent drop. Manufacturers predicted output will increase by 1.3 per cent this month.
The ministry also reported that retail sales increased 3.1 per cent in March compared with a year earlier, extending the streak of gains to 37 months.
Autos, electronics and information and communication machinery were among sectors that made the biggest negative contribution to the results, while production of transportation machinery excluding autos increased, the ministry said.
The data are likely to fuel concerns over the trajectory of Japan’s economy as authorities navigate challenges posed by US trade policy. A 25 per cent levy on US imports of steel and aluminium started in March, with a similar tax on autos and a baseline 10 per cent tariff on all goods kicking in earlier this month. The auto tariffs would hit the core of the nation’s industry in particular, although Trump is now set to ease those duties.
“Factory output is weak and it will probably remain so with the impact of US tariff measures about to hit industry,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “There is no indication at all that manufacturers will be underpinning the overall economy.”
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Wednesday’s data back the case for the Bank of Japan (BOJ) to hold its policy settings steady when the board next sets policy on Thursday. Authorities have indicated they need more time to gauge the impact of the tariffs, and BOJ watchers have pushed back their expected time frames for another rate hike in light of the ambiguity.
Japan’s data stand in contrast to figures reported by South Korea and China, which both beat consensus expectations for March industrial production. China’s output rose 7.7 per cent year on year while South Korea’s increased by 5.3 per cent year on year, with analysts citing front-loading demand as a key driver in both cases.
The combined US tariffs will have a profound impact on Japan’s manufacturing base, especially if the universal 10 per cent tax reverts to the 24 per cent rate that Washington initially announced before giving a three-month grace period. Atsushi Takeda, chief economist at Itochu Research Institute, estimates they will slash Japan’s exports to the US, the biggest shipment destination, by 10 per cent, weighing heavily on factory activity.
Export growth slowed more than expected in March, with shipments to the US rising 3.1 per cent by value, decelerating from February’s 10.5 per cent advance.
The impact of Trump’s tariff campaign has already filtered through to some Japanese companies, with about 10 per cent saying the duties have affected their businesses, according to a survey by the Ministry of Finance this month. Canon last week lowered its profit forecast for this year by about 10 per cent owing to the US levies and a stronger yen against the US dollar.
Indications of trouble among large manufacturers is a worrisome sign for financial officials and the government, as large businesses have until now set the tone for strong wage increases, a vital factor to sustain inflation.
To be sure, some Japanese companies have seen results bolstered in the short term by the tariffs. Toyota Motor’s sales in North America climbed 7 per cent in March, fuelled by a last-minute rush to buy cars before the duties kicked in. That impact is expected to fade from this month.
Meantime, the darkening global economic outlook and the stronger yen may be taking a toll on spending by inbound tourists, who have contributed greatly to demand in recent years. Inbound spending at department stores dropped 10.7 per cent last month from a year earlier, the first reduction in three years, according to the Japan Department Stores Association.
That impact does not appear to have been reflected in the latest retail sales data, as Wednesday’s figures showed growth in retail sales accelerating year on year. Still, sales fell 1.2 per cent month on month.
Japanese consumers have become more careful with discretionary spending due to soaring costs of daily necessities after price gains have stayed at or above the BOJ’s inflation target for about three years.
“A drop in retail sales shows weakness in consumer spending amid the elevated cost of living,” Minami said. “Inbound spending is probably in a lull and households are struggling with inflation with their sentiment going down, so consumer spending is unlikely to clearly pick up anytime soon.” BLOOMBERG
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