Japan factory output rebounds, but retail sales slow in worrying sign for outlook

By Daniel Leussink

TOKYO (Reuters) – Japan’s industrial output rebounded more than expected in July, offering a hopeful sign for the economy and its manufacturers pressured by slowing global demand and a protracted Sino-U.S. trade war.

However, retail sales fell at a faster pace, suggesting that domestic demand may be weaker than previously thought and signalling possible strains for private spending in coming months.

Industrial output rose 1.3% in July, government data showed, more than a median market forecast for a 0.3% gain. It followed a sharp 3.3% drop in the previous month.

Output was pushed up by increased production of cars and chemicals, offsetting a decline for oil products, the data showed.

Manufacturers surveyed by the trade ministry expect output to rise 1.3% in August, but fall again by 1.6% in September.

Friday’s data set paints a mixed picture for Japan’s economy, the world’s third-largest, whose outlook has been clouded by global pressures and early signs of weakness in business sentiment.

“These (output) projections tend to be too optimistic and we think that output will be broadly flat in August,” Marcel Thieliant, senior Japan economist at Capital Economics, said in a note to clients.

“That means that even if it doesn’t fall any further in September, it would shrink a little in the third quarter, consistent with weak GDP growth.”

So far, the export-reliant economy has avoided buckling under a slowdown in overseas demand and expanded an annualised 1.8% in the second-quarter, largely thanks to robust household consumption and capital expenditure.

Japanese exporters also hold hopes for a speedy resolution to bilateral trade negotiations between Washington and Tokyo after U.S. President Donald Trump and Prime Minister Shinzo Abe on Sunday announced an agreement on the core principles of a limited trade deal.

But business expectations have dimmed recently. Japanese manufacturers turned pessimistic about business prospects for the first time in more than six years in August as the spectre of a global downturn looms large, the monthly Reuters Tankan survey showed last week.

Japan’s exports slipped for an eighth month in July as China-bound sales slumped again in a fresh sign the Sino-U.S. trade war could hurt the economy.

Separate data on Friday showed domestic demand might slow in coming months as retail sales dropped 2.0% in July from a year earlier, reflecting recent weakness in household sentiment, above the median estimate for a 0.8% drop.

Tokyo’s core consumer prices (CPI) index, which includes oil products but excludes fresh food prices, rose 0.7% in August from a year earlier. The figure matched the level seen in June last year and was the lowest since May 2018 when the index grew 0.5%.

The jobless rate fell to 2.2% in July, while the availability of jobs decreased, government data showed.

The jobs-to-applicants ratio declined to 1.59 in July, down from June and the median estimate of 1.61.