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Business News/ News / World/  Japan industrial output unexpectedly drops 2.3% as tax hike looms
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Japan industrial output unexpectedly drops 2.3% as tax hike looms

Industrial output falls 2.3% in February compared with the previous month, the steepest drop in eight months

While the weakness partly reflected disruptions from heavy snowfall, the Japan’s factory output data showed manufacturers are bracing for a slump in demand following Tuesday’ s sales tax increase. Photo: BloombergPremium
While the weakness partly reflected disruptions from heavy snowfall, the Japan’s factory output data showed manufacturers are bracing for a slump in demand following Tuesday’ s sales tax increase. Photo: Bloomberg

Tokyo: Japan’s industrial production fell in February, undershooting all forecasts by economists surveyed by Bloomberg News, as the first sales-tax increase since 1997 risks stalling recovery in the world’s third-biggest economy.

Output fell 2.3% from the previous month, the steepest drop in eight months, the trade ministry said in Tokyo on Monday. The median estimate of 28 economists was for a 0.3% . A separate gauge of manufacturing fell in March for a second straight month.

While the weakness partly reflected disruptions from heavy snowfall, the data showed manufacturers are bracing for a slump in demand following Tuesday’ s sales tax increase. Inventories fell for a seventh straight month, lessening the likelihood of even sharper output cuts as the higher consumption levy pushes the economy into a one-quarter contraction in April-June.

“Companies are already cutting production and managing their inventory well, so the fall-off in the second quarter should be modest," said Kiichi Murashima, chief economist at Citigroup Inc. in Tokyo.

The 3 percentage-point increase in the sales tax is forecast to cause the economy to shrink at an annualized 3.5% in the second quarter, before a rebounding growth of 2.1% in the following three months, according to a separate Bloomberg survey.

Prime Minister Shinzo Abe gave the go-ahead for the sales tax increase to help deal with the world’s biggest debt burden, even as he pushes reflationary policies to spur growth and end 15 years of deflation.

Front-loaded budget

The yen was little changed in Tokyo, trading at 102.86 per dollar at 11:53am. The Topix index was up 0.6%, rising for a sixth day after data last week showed household spending in the US rose in February.

Finance minister Taro Aso last week outlined plans to front-load spending in next fiscal year’s budget to help the economy weather the blow from the higher levy. The Bank of Japan (BoJ) has also signaled that it’s ready to boost record easing if needed to drive inflation toward its 2% target.

A survey of manufacturers by the trade ministry pointed to a sluggish rebound following Feburary’s decline. Companies plan to boost production by 0.9% in March and cut it by 0.6% in April, the trade ministry said.

History lessons

Japanese manufacturers appear to be in better shape now than in 1997 when the last sales-tax increase precipitated a tumble in production that later developed into a recession.

“Companies are making long-term demand projections and keeping production and inventory under control before the higher levy takes effect," Yasushi Ishizuka, director of economic analysis office at the trade ministry’s research and statistics department, said after the release.

“They’ve told us they’ve learned their lesson," Ishizuka said. “The projections are limited to a smaller decline compared to the drop in production when the sales tax was last increased."

The seasonally adjusted index of inventories was at 103.8 in February, compared with 124.1 in March 1997, METI data show. Output fell 2.6% in April 1997.

A purchasing managers’ index (PMI) showed slowing expansion in the manufacturing sector in March, with the gauge compiled by Markit Economics and Japan Materials Management Association falling to 53.9 in March from 55.5 in February. A reading above 50 indicates expansion.

The BoJ is under pressure from the markets and politicians to ease further, said Masamichi Adachi, a senior economist at JPMorgan Chase and Co. in Tokyo.

Production forecasts of economists polled by Bloomberg ranged from an increase of 1.2% to a decline of 1.5% in February.

Heavy snowfall

At least 20 centimeters of snow fell in Tokyo on 14 and 15 February, with accumulations 10 times higher in some other parts of the nation. The previous weekend brought the heaviest snowfall in Tokyo in 45 years, public broadcaster NHK reported.

Toyota Motor Corp., Honda Motor Co. and Suzuki Motor Corp. suspended output in some factories in Japan in February after snowstorms disrupted shipments of parts from suppliers. Panasonic Corp. said it experienced supply-chain bottleneck due to the snow. Bloomberg

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Published: 31 Mar 2014, 09:13 AM IST
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