Japan's industrial output unexpectedly fell in August as a slowdown in export growth begins to weigh down Japan's fragile economic recovery, boosting chances of easing by the Bank of Japan at next week's policy meeting.
The output slide, which extended to its third month with August's 0.3 percent drop, is expected to worsen later this year, manufacturers surveyed by the industry ministry.
It adds to bad news from a separate survey showing Japanese manufacturing activity in September shrank for the first time in 15 months, while a key central bank survey of corporate sentiment on Wednesday showed big manufacturers expected the outlook to worsen for the first time 2008.
"It's very negative," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo, of the industrial output data.
He noted that an unexpectedly large effect from yen strength and falling exports compounded the impact of an impending end to subsidies for environmentally friendly automobiles.
"There is already a lot of pressure on the Bank of Japan, but it seems as though the slowdown is worsening, so there will be more pressure on them to do something."
Pressure for Easing
The yen hovered near 83.70 versus the dollar, after hitting a fresh high since Tokyo's Sept. 15 intervention in the currency markets, at 83.50 on the EBS trading platform, far above average levels expected by big manufacturers in the year to next March.
The benchmark Nikkei share average was down slightly, showing little immediate reaction to the data, while the most-active December 10-year JGB futures were marginally weaker after surging to a seven-year high the previous day when the Bank of Japan's tankan survey boosted the prospects for policy easing.
The 0.3 percent fall in August industrial production compared with the median estimate for a 1.1 percent increase and followed a 0.2 percent fall the previous month.
Retail sales rose 4.3 percent in August from a year earlier, helped by robust demand for air-conditioners in a record heat wave.
Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to dip 0.1 percent in September and slide a steeper-than-expected 2.9 percent in October, data showed.
Adding to concerns, the Nomura/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 49.5 in September from 50.1 in August, showing manufacturing activity contracted for the first time in 15 months.
Some analysts say further monetary easing is needed to ensure that intervention succeeds in shielding the economy from a strong currency. The government for its part is mulling an extra budget to prop up the economy by boosting jobs and helping households.
The BOJ will hold its next rate review on Oct. 4-5 and may ease policy further, with options including an increase in government bond buying and expanding a cheap fund-supply tool, sources say.
Japan's economy grew 0.4 percent in April-June as capital spending grew on the back of exports. But analysts expect the economy could hit a soft-patch later this year or early next year as exports slow and stimulus-driven consumption fades.
The Bank of Japan's tankan survey for September showed manufacturers turned more pessimistic about future conditions for the first time in almost two years as a strong yen could derail the economic recovery.
© 2017 Thomson/Reuters. All rights reserved.