Japan's Mad Money Printing Not Working: June Industrial Production Plunges, Shipments Down For 5th Straight Month

By Stanley White at Reuters

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 percent month-on-month drop far exceeded the median 1.2 percent fall forecast in a Reuters poll of economists, and followed a 0.7 percent increase in May, data from the Ministry of Economy, Trade and Industry (METI) showed on Wednesday.

In unusually frank language, a METI 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 METI 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 hike, with a Reuters poll conducted in July projecting a 1.4 percent quarterly drop.

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 percent. We think it's likely to settle closer to the 0.9 percent 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 percent in July and increase 1.1 percent in August as the pain from a sales tax hike in April faded.

But the METI 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 grow 0.6 percent in the current quarter, however, as household spending recovers from the tax hike and government stimulus measures support domestic consumption.

"The pent-up demand ahead of the sales tax hike was bigger than expected so the consequent downturn is pretty steep, which is probably why output fell so much in June," said Junko Nishioka, chief Japan economist at RBS Securities.

"We don't expect output to keep falling in the current quarter as the tax hike effect is fading," she said. "Still, the slow pace of recovery in exports may weigh on output."

Some economists have said they may need to lower their forecasts as exports have disappointed for the past few months, and the worse-than-expected industrial production data could increase uncertainty about the economy.

Exports fell 2.0 percent in June from a year earlier, despite the yen falling by about 20 percent, while imports increased 8.4 percent.

Japanese companies have been shifting production capacity overseas for better access to faster-growing markets, so the weak yen is not helping to increase exports.

Many economists worry that export weakness will continue as it will be difficult to encourage companies to bring that production capacity back to Japan. (Additional reporting by Leika Kihara; Editing by Eric Meijer)


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