Regions

Solid rebound in Japan factory output eases economic concerns

October 28
9:25 PM 2014

Japan's industrial output rose in September at the fastest pace in eight months in a tentative sign of recovery in factory activity, offering some relief for Prime Minister Shinzo Abe as he moves closer to making a decision on a second sales tax hike.

The 2.7 percent rise in factory output topped economists' median estimate of a 2.2 percent increase in a Reuters poll, the Ministry of Economy, Trade and Industry data showed. That followed a 1.9 percent drop in August.

The upbeat data follows a run of weak economic reports after a sales tax hike in April drove the world's third-biggest economyinto its deepest quarterly slump since the 2009 global financial crisis in the second quarter, casting doubt about a planned second tax increase in October 2015.

Some analysts think the third quarter growth figures would be robust enough to allow Abe to proceed with the tax hike - a key plank in Tokyo's strategy to curb Japan's mammoth debt load.

"It is safe to say that the declines in industrial output are over," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co.

"I think economic growth in the third quarter will be strong enough to allow for another sales tax hike, but it all depends on how confident the politicians are about the economy."

The fragile economic recovery has raised speculation about additional stimulus by the government and central bank.

Still, the Bank of Japan is in no mood to ease policy again at its policy review on Friday when it is expected to slash its growth projections but stick to its rosy view that the economy is on track to meet a 2 percent inflation target sometime next year.

On Tuesday, policy makers received more welcome news on consumption when government data showed retail sales rose for the third straight month in September.

The rare bright spots, however, fail to mask the painfully slow economic recovery.

The ministry data showed output rose due to increase production of cars, flat panel displays and solar panels. Factory activity has been languishing since April's tax hike to 8 percent from 5 percent, which dampened demand for cars and housing construction, leaving companies saddled with a pile of inventories of unsold goods.

Indeed, the outlook was mixed as manufacturers surveyed by the ministry said they expected output to fall 0.1 percent in October but increase 1.0 percent in November, the data showed.

Other key indicators for September due this week are also likely to show falling household spending, slowing consumer inflation and a rising jobless rate.

The government plans to raise the sales tax to 10 percent in October 2015 in a bid to fund bulging welfare costs and rein in mammoth public debt that at twice the size of the economy is by far the worst ratio in the industrial world.

But there are lingering concerns the economy may not be able to withstand another tax hike impact, fuelling speculation Abe may delay the second tax hike.

Analysts polled by Reuters forecast the economy would grow an annualized 2.9 percent in the third quarter, after an annualized 7.1 percent slump in the prior three months.

The BOJ is preparing to roughly halve its 1 percent economic growth forecast for this fiscal year at a meeting on Friday but stand by its prediction that inflation will hit its 2 percent target in the year that begins April 2015.

Many private economists are skeptical that the BOJ will meet its inflation target and see it easing policy further.

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