Japan industrial production drops again

Story highlights

  • Former Bank of Japan official says Japan could face recession number six
  • Data come hours before world's central bankers converge on Jackson Hole, Wyoming
  • Deflation in Japan lingers
Japan added to global growth jitters on Friday by posting unexpectedly weak industrial production numbers for July and a muted outlook for August and September.
Economists had been expecting a 1.7% increase in output from the manufacturing sector from June, boosted by the effects of reconstruction spending in the tsunami-hit Tohoku area.
Instead, preliminary government data suggested that production sank 1.2% in July. Manufacturers are now forecasting production to increase 0.1% in August, then fall 3.3% in September.
Masamichi Adachi, senior economist at JPMorgan in Tokyo, described the data as "incredibly poor," noting that if manufacturers' forecasts were accurate, industrial production would decline for three consecutive quarters -- a prelude to all five of Japan's recessions since 1985.
If external demand remained downbeat, it would be very hard for Japan to avoid recession number six, the former Bank of Japan official said.
"We can all cross our fingers that China is picking up, that the U.S. 'fiscal cliff' can be avoided, or that Greece can remain in the euro-area. It is a very, very difficult time for the global economy."
The data from Japan, just hours before many of the world's central bankers converge on Jackson Hole, Wyoming, to discuss ways to revive growth, will intensify fears that extraordinarily loose monetary policies in developed markets are failing to stimulate demand.
Interest rates in the world's third-largest economy have been rooted near zero for almost two years, during which time the BoJ has steadily expanded an asset-purchasing programme. However, growth has been very vulnerable to swings in external demand, and has depended in recent quarters on government incentives to buy cars and a steady increase in public investment projects.
Meanwhile, deflation has lingered. According to separate data on Friday, core consumer prices (excluding fresh food) fell 0.3% in July from a year earlier, a faster decline than 0.2% in June and 0.1% in May.
Japan's subdued industrial production data was consistent with readings in South Korea, where it fell 1.6% in July from June, more than the expected 0.9% contraction, the government announced on Friday. Production of chips, ships and cars all fell, suggesting that manufacturers are running down inventories in anticipation of continued weakness in Europe and China.