UPDATE 2-Japan factory output slides unexpectedly, risks of recession rising

30 Sep 2015 | Author: | No comments yet »

Japan factory output slides, risks of recession rising.

Japan’s factory output unexpectedly fell for the second straight month in August, fuelling worries the economy is slipping back into recession and raising more doubts about whether the government can reignite growth and end decades of deflation. As a slowdown in China chills global growth, hitting export-reliant Asia particularly hard, analysts say the Bank of Japan may be forced to offer fresh stimulus as early as next month to get the faltering economy back on track. “In the absence of growth engines due to weakness in external and domestic demand, the possibility is growing that the economy has shrunk for a second straight quarter in July-September and it may be slipping into a recession,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute. “Given weakening of the economy, the BOJ could ease policy again next month, even though Governor (Haruhiko) Kuroda remains bullish and the government is wary about further yen weakening boosting the cost of imports.” The economy shrank an annualised 1.2 per cent in April-June. They’re holding back investment as inventories pile up in warehouses at a time when Abe wants them to ratchet up wages and funnel cash into new capital equipment. “The economic recovery has ground to a halt,” said Marcel Thieliant, a Singapore-based economist for Capital Economics.

However, few – if any – investors expect the target to be reached as a renewed drop in oil costs saw prices fall for the first time since the BOJ deployed its massive asset purchases more than two years ago. Thieliant, along with economists at Mizuho Securities, SMBC Nikko Securities and Nomura Securities all flagged the risk that gross domestic product for the quarter ending today may have contracted. The weak indicators have rekindled doubts about Prime Minister Shinzo Abe’s ‘Abenomics’ strategy of reviving growth through fiscal expansion, monetary stimulus and structural reforms. Speaking in New York at a news conference on Tuesday, Abe said: “We have come to the point where a bit more effort is required,” to pull the world’s third-biggest economy out of deflation. The BOJ will scrutinise a batch of data – including its key tankan survey due on Thursday and household spending out Friday – at its policy review next week.

Today’s data is a bitter pill for Abe, who is returning his attention to the economy after focusing on the passage of unpopular defense bills in recent months. It has already pumped 180 trillion yen (US$1.50 trillion) into the economy since launching a massive stimulus programme in April 2013, and each month gobbles up government bonds equivalent to about 1 per cent of Japan’s GDP.

Last week he unveiled a new economic growth target and and vowed to halt Japan’s population slide. “We have to look into the possibility of a third-quarter contraction,” said Masaki Kuwahara, an economist at Nomura in Tokyo. “Policymakers will consider an extra budget and further monetary easing.” The government should assemble a spending package to shore up the economy, which could then be followed up by the central bank cranking up its stimulus, Heizo Takenaka, an adviser to Abe, said on Tuesday.

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