Japan's industrial output slumps

Japan's output unexpectedly fell while stronger retail sales and an improving job market showed resilience in the world's third-biggest economy as Prime Minister Shinzo Abe weighs another sales-tax increase.

Industrial production declined 1.5 per cent in August from July, compared with the median estimate of economists surveyed by Bloomberg News for a 0.2 per cent gain. Retail sales increased 1.9 per cent and the jobless rate slid to 3.5 per cent.

The data underscore headwinds for manufacturers as the yen trading near a six-year low fails to lift output, even as domestic demand crawls back after a blow from April's tax hike. Abe's government has signaled it's prepared to boost stimulus to help consumers and businesses weather any further increase in the levy next year.

"Consumption related data shows signs of picking up but production is weak, so the negative side prevailed overall," said Akiyoshi Takumori, chief economist, Sumitomo Mitsui Asset Management Co.

The yen traded at 109.29 per dollar at 1:43 p.m. in Tokyo after yesterday touching 109.75, the highest since August 2008. The Topix stock index fell 1.3 percent.

Abe is counting on a rebound from the steepest contraction in five years in the second quarter as he considers whether the economy can bear higher tax to help curb the world's biggest debt burden. The job market showed resilience, with 1.1 positions on offer for every seeker, highlighting constraints facing companies that could encourage wage increases.

Wage Gains
Labor cash earnings -- which includes base pay, overtime and bonuses -- increased 1.4 percent in August from a year earlier, the sixth straight rise. Abe met with business and labor leaders yesterday, as he seeks to sustain momentum for wage gains that he wants to drive consumer spending.

A virtuous cycle in the economy is working, Bank of Japan Governor Haruhiko Kuroda said in a speech yesterday, adding that the central bank would adjust policy if necessary to achieve its inflation target.

He and Abe still face hurdles. The higher sales tax has added to the cost of living, with consumer prices climbing 3.3 percent, outpacing the gains in pay, according to data last week. The number of new jobs per applicant -- a leading gauge of employment conditions -- slipped to 1.62 in August from 1.66 in July, today's data showed.

"The weakness in output since the beginning of the year will take its toll on the job market in coming months," Marcel Thieliant, a Singapore-based economist at Capital Economics, wrote in an e-mailed note.

Recession Risk
The drop in industrial production could add to risks that Japan's economy has fallen into recession according to criteria tracked by the government.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, said that if economic indicators continue to be weak, pressure is likely to rise for further monetary easing.

Manufacturers have been cutting output to reduce inventories that in August reached the highest since February 2009. Industrial production is forecast to rise 6 percent in September and decrease 0.2 percent in October, today's report showed.

Abe will decide by the end of this year whether to raise the sales tax to 10 percent in October 2015 from 8 percent. The economy is forecast to rebound this quarter, posting annualised growth of 3.4 percent, according to a Bloomberg News survey of economists, after contracting 7.1 percent in the three months through June.

Economic Stimulus
The government won't increase the levy without support measures, Economy Minister Akira Amari said earlier this month. A back-up plan for stimulus will be prepared, according to Finance Minister Taro Aso.

Toyota Motor Corp. (7203) cut domestic output by 10 percent in August from a year earlier, the fifth straight monthly fall. Nissan Motor Co. slashed output in Japan by almost 21 percent, the third straight monthly cut. Nissan's domestic sales dropped 21 percent in August, the seventh straight monthly decline.