Japan's economy stuttering ahead of China crisis

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Japan released yet more worrying figures Friday showing the world's third largest economy was already stuttering before a damaging territorial dispute erupted with its largest trading partner. Factory output in August shrank by a bigger-than-expected 1.3 percent from the previous month, the industry ministry said as it admitted production activity was weakening. The decline was much sharper than an average market forecast of a 0.4 percent drop.


Japan's export-driven economy is struggling to right itself following a series of problems, including the March 2011 earthquake and tsunami disaster, the European debt crisis, slowing Chinese demand and the strong yen. "Industrial Production appears to be weakened," the ministry said in a statement, downgrading its overall assessment. It had said production "appears to be flat" when it announced July's preliminary data a month ago.

Japanese businesses are now worried about taking a hit from the effects of a flare-up in the row between Tokyo and Beijing over the ownership of islands in the East China Sea. Japan's nationalisation in September of three islands in the chain, called Senkaku in Japan and Diaoyu in China, triggered anti-Japan rallies across China. Major Japanese companies were forced to close factories briefly.

Auto giants Toyota and Nissan said Wednesday they would cut production in China because demand for Japanese cars has dropped, while airlines have been hit by cancellations of seats on China-bound flights. Mooted Chinese consumer boycotts of Japanese products are also feared, unsettling firms sending goods to China, Japan's number one export market.

The industry ministry, citing a survey of production forecasts by manufacturing companies, said factory output is expected to fall by a further 2.9 percent in September and to be flat in October. Mizuho Securities Research and Consulting senior economist Norio Miyagawa said the ministry's outlook survey suggested "output may lose steam even further.

"We are likely to see sluggish output at least until October, especially in the automobile sector," he told Dow Jones Newswires, noting the row with China was a downside risk for the economy. "If the current disputes with China become prolonged, that will damage Japan's output and the economy.

Kengo Suzuki, forex strategist at Mizuho Securities, said "a fall in foreign demand could further pressure the Japanese economy.” It could also raise expectations for further monetary easing in the long run, he added. The Bank of Japan followed its US and European counterparts last week, announcing $128-billion extra bond buying to take its total monetary easing effort past $1 trillion as it seeks to revitalise the economy.

Economists attributed the August fall to weakening domestic consumer spending and stocked-up inventories as well as China's corporate performance and the debt crisis in Europe. Data released by the internal affairs ministry Friday showed so sign of Japan's breaking out of years of deflation.

Core consumer prices in Japan, which excludes volatile prices of fresh food, fell for the fourth straight month in August, dropping 0.3 percent year-on-year, data showed. The ministry also said in a separate survey Friday that household spending rose a modest 1.8 percent in August from a year earlier. Meanwhile, the country's jobless rate fell slightly to 4.2 percent in August, down from 4.3 percent in July.

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