The industrial production miss and the softer retail print complicate the case for the Bank of Japan to move again quickly, and traders will weigh them against the strength implied by manufacturers' own projections for September and October. A former BoJ executive director has put the chance of an October hike at around 20% to 30%, so soft data could nudge that view lower, although the bank's shift toward preventing an inflation overshoot argues against reading too much into one month. The yen is the natural place for any repricing to show up, with hawkish BoJ expectations having been part of the recent backdrop. The next tests are September data and the Tankan business survey, which will show whether August was a blip.
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Japan's August data missed on both output and retail sales, but manufacturers' upbeat projections for September and October leave the underlying picture unresolved.
Summary:
- Japan's August industrial output fell 1.7% m/m (forecast +1.7%, prior revised to -0.2%), and rose 3.4% y/y, down from a prior 3.9%.
- Retail sales fell 1.2% m/m after a 2.4% rise, and grew 2.7% y/y against a forecast of 3.3% and a prior of 3.7%.
- Manufacturers surveyed by METI expect output to increase 3.2% in September and 3.1% in October, a sharp reversal from the earlier September forecast of a 4.2% fall.
- The August output fall compares with METI survey projections in July for a 6.4% rise for the month.
- The BoJ raised its policy rate to 1.25% in September, the highest since 1995, and a former BoJ executive director sees a 20% to 30% chance of a further hike in October.
Japan's factory output fell in August and retail sales growth slowed, adding a note of caution to an economy that showed some resilience in July. Government data released on Wednesday showed industrial production fell 1.7% from the previous month, against a median market forecast for a 1.7% rise. That followed a 0.2% decline in July, a figure revised from the initial reading of a 0.1% gain. Output was up 3.4% from a year earlier, slower than the prior pace of 3.9%.
Retail sales also softened. Sales fell 1.2% on the month, reversing much of the 2.4% jump recorded in July, when consumer spending had beaten expectations. On an annual basis, retail sales grew 2.7%, below the 3.3% forecast and slower than the 3.7% prior reading, which was itself revised from an initial figure of around 4%.
The manufacturers' outlook was more upbeat. In the survey by the Ministry of Economy, Trade and Industry (METI), manufacturers expect seasonally adjusted output to increase 3.2% in September and 3.1% in October. That is a sharp swing from the previous forecast, which had pointed to a 4.2% decline in September. The August result is also well short of the 6.4% rise manufacturers had projected for the month in the July survey, which is a reminder of how far these projections can diverge from outcomes.
The data arrive as the Bank of Japan tightens policy. The BoJ raised its rate by 25 basis points to 1.25% in September, the highest level since April 1995, in a 7-2 vote. Governor Kazuo Ueda said the bank had entered a new phase, shifting its focus from coaxing underlying inflation toward 2% to preventing it from overshooting. A former BoJ executive director told Bloomberg he sees a 20% to 30% chance that the bank raises rates again in October, earlier than many economists expect. The bank's next meeting is in late October.
Manufacturing has also been contending with disruption linked to the US-Iran war, which Investing.com said had been a backdrop to Japan's July figures. Whether August marks a temporary setback or a broader loss of momentum is likely to become clearer with September production and retail data, and the Tankan business survey due in the coming days.
This article was written by Eamonn Sheridan at investinglive.com.