(Bloomberg) -- Japan’s factory output dropped in June, adding to signs that the economy is struggling to recover from a contraction earlier in the year.
Industrial production declined 3.6% from May led by automakers and production machinery makers, the Industry Ministry reported on Wednesday. That compared with the consensus estimate of a 4.5% drop. Output fell 7.3% from a year ago, but gained 2.9% in the three months through June from the previous period, suggesting it provided some support to the economy last quarter.
Separately, retail sales rose 0.6% in June from May, while they gained 3.7% from a year ago.
The production of cars and auto parts drove the reading lower as an ongoing scandal involving Japan’s large carmakers such as Toyota Motor Corp. continues to disrupt output. Toyota is extending its suspension of production of three models, following a government probe into its faulty vehicle certifications. Still, solid exports signal that global demand remains relatively strong, offering some support for Japan’s production.
“The impact of the auto scandal drove down production in June, which I think is a temporary factor,” said Toru Suehiro, chief economist at Daiwa Securities Co. “Given production rose on a quarterly basis, output will contribute to GDP positively. But at the same time I’m not expecting production to gain a lot of momentum from here.”
The lackluster output result dims the outlook that the economy will stage a recovery in the three months through June, with consumption also remaining weak. Analysts expect the economy to rebound moderately in the second quarter after contracting in the first three months of this year.
What Bloomberg Economics Says...
“The slump in Japan’s industrial production in June — likely due to a factory stoppage by a major carmaker — could put a dent in second-quarter GDP. The economy, which has been recovering from a plunge in 1Q, could be stalled by a decline in auto exports and private purchases of cars due to widening safety scandal in Japan’s auto sector.”
— Taro Kimura, economist
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Retail sales are likely to have been inflated by ongoing price hikes, and a question remains over whether wage gains will help consumers accept inflation. Still, department store sales jumped 13.5% from the previous year, with operators benefiting from increased spending by wealthier shoppers despite the inflationary environment, while others look for lower prices for their daily necessities.
Wednesday’s data come as the Bank of Japan concludes its two-day policy meeting later in the day. Analysts are split over whether the BOJ will raise interest rates this time or opt to wait for more economic data to see if demand driven inflation is taking root in Japan.
BOJ officials see weakness in consumer spending complicating their decision over whether to raise interest rates, according to people familiar with the matter.
“We are likely to see the economy return to expansion in the second quarter after poor results in the previous period,” said Daiwa’s Suehiro. “Given that, if the BOJ raises interest rates today, it won’t be criticized immediately about such a move.”
(Updates with more details, economist comments)
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