August industrial output drops in Japan and South Korea

Slowdowns in China and Europe blamed for the more than expected decline in August production, fuelling need for monetary easing

PUBLISHED : Saturday, 29 September, 2012, 12:00am
UPDATED : Saturday, 29 September, 2012, 2:32am

Japanese and South Korean industrial production fell more than economists estimated last month as slowdowns in China and Europe weighed on exports, building the case for more monetary easing.

Japan's output fell 1.3 per cent from July, the biggest decline in three months, a Trade Ministry report said. Korean production slid 0.7 per cent, partly on a strike at Hyundai Motor.

An increasing risk that Japan's economy will shrink this quarter and the failure of central bank loosening to dislodge deflation may increase pressure for officials to ease at either of two meetings next month.

Yesterday's data adds to China's weakest industrial production growth in more than two years in highlighting the failure of policy support to reverse a slowdown across Asia.

"I'm convinced we'll see a contraction in Japan's [gross domestic product] this quarter because consumption, exports and private investment are falling," said Masamichi Adachi, a senior economist at JP Morgan Securities and a former central bank official. "Prices in Japan are falling because the economy is weak."

The Nikkei-225 Index fell 0.89 per cent yesterday.

A report due today from HSBC Holdings and Markit Economics may indicate that Chinese manufacturing contracted this month for an 11th consecutive month.

Baoshan Iron & Steel, China's largest listed steelmaker, said this week it suspended production at a plant after demand fell for slabs used in ships and bridges.

Economists had expected declines of 0.5 per cent in Japan's output and 0.4 per cent in Korea's, according to the median forecasts in surveys by Bloomberg.

Korea would need to cut interest rates again next month to avoid rapid gains in the won as a result of easing elsewhere, said Kim Hyeon-wook, an economist at SK Research Institute and a former adviser to the Bank of Korea's monetary policy committee.

Kim said the Hyundai strike affected output and a slowdown in car exports would be "bad for Korea".

Japan's consumer prices excluding fresh food fell 0.3 per cent last month from a year earlier, matching the steepest decline in 16 months, another report showed. The country's jobless rate slid 0.1 percentage point to 4.2 per cent as more people stopped seeking jobs. Retail sales rose 1.8 per cent.

"Asian exports and production are weakening due to slowdowns in China and Europe," said Glenn Levine, a senior economist at Moody's Analytics in Sydney. "The data makes it more likely that Japan's economy will contract this quarter."

JP Morgan, Barclays Securities and BNP Paribas expect a contraction in Japan after growth slowed to a 0.7 per cent annual pace in the second quarter.

Challenges span political tensions with China, the fading effects of car subsidies and strength in the yen, which was at 77.59 to the US dollar yesterday afternoon.