Japan’s output falls as US tariffs bite, inflation slows

[TOKYO] Japan’s factory output slumped in July, data showed on Friday (Aug 29), complicating the central bank’s decision on the next rate-hike timing.

The decline came as US tariffs bite and a leading indicator of nationwide inflation slowed.

While Japan’s jobless rate hit a multi-year low in July due to a tight job market, retail sales rose much less than expected, in a sign that rising living costs were weighing on consumption.

Signs of persistent inflationary pressure and downside risks to growth highlight the challenge that the Bank of Japan (BOJ) faces in determining how soon to resume interest rate hikes.

“Sticky inflation is eroding wage gains, keeping consumer spending weak,” said Stefan Angrick, head of Japan and frontier market economics at Moody’s Analytics.

“The poor run of data will keep the Bank of Japan on hold until year’s end. Japan’s manufacturers will stay stuck in the doldrums, with few clear sources of support.”

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Industrial output fell 1.6 per cent in July from the previous month, government data showed, more than a median market forecast for a 1 per cent drop. This was due partly to a 6.7 per cent decline in automobile production.

Manufacturers surveyed by the government expect output to grow 2.8 per cent in August before dipping 0.3 per cent in September.

While the bilateral trade agreement in July is likely to lower US tariffs on Japanese automobiles to 15 per cent, there is uncertainty on when the cut will apply as US President Donald Trump has yet to sign an executive order.

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Complicating the BOJ’s policy, stubbornly high food prices have kept inflation in capital city Tokyo – seen as a leading indicator of nationwide trends – above its 2 per cent target.

The Tokyo core consumer price index, which excludes volatile fresh food but includes fuel costs, rose 2.5 per cent in August from a year earlier, matching a median market forecast.

It slowed from a 2.9 per cent rise in July, due largely to government fuel subsidies that pushed down utility bills.

But food inflation, excluding the cost of fresh food items such as vegetables, hit 7.4 per cent, steady from the previous month, reflecting stubbornly high prices of rice, coffee beans and other groceries.

An index that strips out both volatile fresh food and fuel costs – which is closely watched by the BOJ as a better gauge of underlying inflation – rose 3 per cent in August from a year earlier, after a 3.1 per cent gain in July.

The data will be among factors that the BOJ will scrutinise at its next two-day policy meeting that begins on Sep 18.

The central bank ended a massive, decade-long stimulus programme last year and raised short-term interest rates to 0.5 per cent in January, on the view that Japan was on the cusp of durably hitting its inflation target of 2 per cent.

While inflation has held above 2 per cent for well over three years, BOJ governor Kazuo Ueda has stressed the need to tread cautiously on further rate hikes, to ensure price rises are driven by wage gains and robust domestic demand.

An intensifying labour shortage is likely to keep upward pressure on wages. The jobless rate fell to 2.3 per cent in July from 2.5 per cent a month earlier; this marked the lowest level since December 2019, government data showed on Friday.

But separate data showed that retail sales rose just 0.3 per cent in July from a year earlier, confounding market expectations for a 1.8 per cent rise in a sign the rising cost of living was hurting consumption.

Nearly two-thirds of economists polled by Reuters in August expect the BOJ to raise its key interest rate by at least 25 basis points again later this year, up from just over half a month ago.