More gloomy data casts doubt on Japan recovery

TOKYO (AFP) ― Japan’s factory output saw a surprise drop and household spending kept falling in August, data showed Tuesday, fanning fears about the impact of April’s sales tax rise on the economy.

The figures will add to worries that the country’s tentative recovery has been knocked off kilter by the increased levy and strengthen the hand of those arguing against another hike next year.

Industrial production shrank 1.5 percent month-on-month in August after rising 0.4 percent in July, the ministry of economy, trade and industry said. The latest reading also missed a market median forecast of a 0.3 percent rise.

Separate data from the internal affairs ministry showed household spending in August fell a steeper-than-expected 4.7 percent from a year earlier. Spending has now fallen for five straight months since the government raised the sales tax from 5 percent to 8 percent.

The latest fall was sharper than the market forecast of a 3.6 percent drop and came after a 5.9 percent plunge in July.

Yet more weak data is likely to force policymakers to take a hard look at the state of the economy.

The government and central bank leaders have argued the world’s third largest economy remains broadly on a recovery path and has withstood a temporary shock from the tax rise.

But that position is getting harder to defend, say observers. “There is no sign at all of a V-shaped economic recovery previously forecast by the government,” said Norinchukin Research Institute chief economist Takeshi Minami.

Demand for durable goods remains weak, compounded by a buying spree ahead of the tax hike, and “as far as demand for services and non-durable items is concerned, people are keeping a tight grip on their wallets because of a continued decline in real wages,” he told Dow Jones Newswires.

Marcel Thieliant, economist at Capital Economics, said in a note that Tuesday’s data “are unlikely to dispel concerns about the pace of recovery from last quarter’s slump.”

A rebound in industrial production in September is likely but manufacturing companies predict yet another month-on-month decline of 0.2 percent in October, he noted, citing a survey by the industry ministry.

The one ray of light for the government is that unemployment remains low, with the jobless rate falling to 3.5 percent in August from 3.8 percent in July.

But Thieliant warned “the weakness in output since the beginning of the year will take its toll on the job market in coming months.”

“Accordingly, we expect the unemployment rate to climb to 4.0 percent by the end of the year,” he said.

Investors are now waiting for the Bank of Japan’s release Wednesday of its quarterly Tankan business sentiment survey.