Japan's industrial output falls at fastest pace since March 2011 tsunami

Decline in June industrial production comes as companies reduce inventories, casting a shadow over reforms after years of deflation

PUBLISHED : Wednesday, 30 July, 2014, 11:03am
UPDATED : Thursday, 31 July, 2014, 1:11am

Japan's June industrial output fell at the fastest rate since the earthquake and tsunami of March 2011 as companies slowed production to offset a build-up in inventories, clouding the outlook for the economy.

The 3.3 per cent month-on-month drop far exceeded the median 1.2 per cent fall forecast in a Reuters poll of economists, and followed a 0.7 per cent increase in May, data from the Ministry of Economy, Trade and Industry showed yesterday.

A ministry spokesman said the data showed shipments of goods fell for five consecutive months - a pattern similar to the last time Japan was in recession in the middle quarters of 2012.

The data and the ministry official's comments suggest the economy may struggle to rebound in the current quarter following an expected contraction in the second quarter from the sales tax increase.

The ministry cut its assessment of output, saying it had "weakened".

The decline in output could deepen policymakers' fears for the economic outlook and the government's "Abenomics" plan to defeat 15 years of deflation and restore growth.

"We are sceptical that Abenomics will restore GDP growth to its pre-financial crisis average of 1.8 per cent. We think it's likely to settle closer to the 0.9 per cent average of the 1990s Lost Decade," HSBC Japan economist Izumi Devalier said in a note to clients.

Manufacturers surveyed by the ministry expected output to rise 2.5 per cent in July and increase 1.1 per cent in August as the pain from a sales tax rise in April faded.

But the ministry official told reporters these forecasts were overly optimistic because the high level of inventories, especially of durable consumer goods, meant manufacturers needed to curb output further.

Analysts expect the economy to grow 0.6 per cent in the current quarter, however, as household spending recovers from the tax increase and government stimulus measures support domestic consumption.