(Bloomberg) — Japan's factory output rebounded in December, providing further evidence that the sputtering economy is back on track to growth and potentially clearing a hurdle for the Bank of Japan as it considers the timing of a likely interest rate hike.
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Industrial production rose 1.8% from November after falling in the previous month as output of machinery and chemicals increased, the industry ministry said on Wednesday. That was the biggest gain since June, although smaller than the widely expected 2.5% increase.
A separate report painted a bleaker picture of the economy as retail sales fell 2.9% since November, putting them 2.1% above a year ago and raising doubts about the strength of domestic demand as inflation weighs on household budgets.
The output increases will support the economy and suggest it is likely to recover in the fourth quarter after a sharp summer decline. That should clear another obstacle on the way to the country's first interest rate hike since 2007, a move that two-thirds of economists surveyed by Bloomberg expect by April.
Still, retail weakness points to the economy's continued fragility as consumers carefully monitor spending amid the strongest inflation cycle in decades. This is a factor that could prompt the central bank to hold off on further interest rate hikes once it has abolished its negative interest rate.
“The economic outlook is mixed, but there are some positive trend elements,” said Harumi Taguchi, chief economist at S&P Global Market Intelligence. “I expect GDP to return to moderate growth. But production will turn negative in the current quarter due to Toyota-related automobile production issues and the impact of the Chinese New Year holiday.”
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The report showed factory output rose 1.4% in the quarter ended December compared with the previous three months, compared with a 1.2% decline in the summer as Japan's economy contracted.
Components supporting factory output expansion last month included testing equipment, conveyor belt systems, chemicals and semiconductor-related equipment.
Production was supported by stronger-than-expected exports in December, with shipments to the U.S. rising by double digits and shipments to China increasing for the first time in more than a year. But analysts warn that foreign demand is likely to falter given the expected slowdown in the global economy.
Growth in both the U.S. and China is expected to slow this year, although the International Monetary Fund's latest forecasts for the global economy are slightly more optimistic than three months ago.
The manufacturing report showed that the ministry expects factory output to fall sharply by 6.2% in January, a less promising sign for growth in 2024. The forecast may reflect concerns about the impact of the New Year's Day earthquake in northwestern Japan.
Analysts expect the Japanese economy to post annual growth of 1.1% in the final quarter of 2023, avoiding a technical recession. A gross domestic product report is due on February 15.
What Bloomberg Economics says…
“Looking further ahead, we expect production to moderate in January. Slowdowns in overseas markets such as China could weigh on overall demand, but improving semiconductor demand should support production of related products.”
— Taro Kimura, economist
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Retail was supported by pent-up demand from the pandemic as well as a broad price increase that drove up the value of sales. But inflation is weighing on spending as wage growth lags behind prices.
Companies and their unions are in the middle of annual wage negotiations. The first results are expected for March. Those results are likely to be one of the final pieces of the puzzle that will determine when the BOJ will raise interest rates, with some economists predicting a move in March.
“The wage negotiations in the spring are expected to lead to strong wage increases. Consumption is currently weak but should stabilize as inflation eases,” Taguchi said. “I think the BOJ will most likely end negative interest rates in April.”
– With support from Gareth Allan and Isabel Reynolds.
(Adds comments from economist)
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