Reuters | Fri Jul 30, 2010 | 11:36am IST
Japan suffered the biggest fall in factory output in more than a year in June and manufacturers see more cuts in July, boding ill for the fragile economic recovery in the face of a strong yen and weakening overseas demand. In a sign of growing concern about Japan’s economic outlook, a group of ruling party lawmakers renewed calls for the Bank of Japan to target inflation and weaken the yen with monetary policy to help an economy mired in deflation. Core consumer prices fell in annual terms for the 16th straight month in June, prolonging a spell of deflation that threatens to derail recovery by encouraging consumers and businesses to put off spending. The ruling Democratic Party is unlikely to adopt in full suggestions from the group composed mostly of junior lawmakers, but government and opposition MPs may join forces in calls for more central bank action should the economic outlook dim and the yen rise further. “The government is likely to keep pressuring the BOJ for more easing due to its tight fiscal conditions,” said Yuichi Kodama, economist at Meiji Yasuda Life Insurance.
The government coalition has promised to beat deflation in the next fiscal year starting in April but its hands are tied by public debt that is nearly twice the size of the economy’s $5 trillion annual output. The yen brushed off the data, trading at an eight-month high against the dollar and near its 14-year highs. However, September 10-year futures jumped to trade 0.20 point higher on the day, edging towards a seven-year high struck last week. Finance Minister Yoshihiko Noda told reporters that he would study the panel’s proposals, while he and his deputy also showed growing concern about the currency’s strength.
While economists had expected factory output to cool from recent sharp gains as exports moderate, a 1.5 percent drop surprised markets that had forecast a 0.2 percent increase. Furthermore, the drop, which was the biggest decline since February 2009, came with manufacturers’ forecast that July output would dip further before bouncing back somewhat in August. The world’s second-largest economy grew at a brisk annualised pace of 5 percent in the first quarter and economists expect it to expand by 2.6 percent in the 2010/2011 fiscal year. However, policymakers worry about the impact protracted deflation may have on recovery and those concerns, compounded by signs of a slowdown in the United States and China, have led to renewed calls for the central bank to do more to support growth. “The recent slowdown in exports has started to affect production and there may be more downside risks if China’s economy slows down,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “The latest series of data has increased the possibility of the Bank of Japan easing its policy further. The BOJ could lower the policy rate or increase its Japanese government bond buying.
A ruling party panel of mostly rank-and-file MPs proposed that Japan set an inflation target of 2-3 percent and revise the BOJ law to make the central bank responsible for maintaining full employment in addition to price stability. Panel member Takeshi Miyazaki told reporters a strong yen should be dealt with by easing monetary policy further and not with currency intervention. The small opposition Your Party, expected to cooperate with the Democrats on some policies after a good showing in an upper house election this month, has floated similar proposals. Lawmakers are worried that they yen’s strength combined with slackening Asian demand for Japanese imports may stifle growth.
Car manufacturers and mobile phone parts makers cut production by the most in more than a year as they adjusted inventories and as demand from Asia slowed. “The rapid pace of the decline (in output) is worrying, suggesting how the Japanese economy has taken a blow from the yen’s rise in June,” said Ayako Sera, market strategist at Sumitomo Trust & Banking Co in Tokyo. Separate data showed core consumer prices, which include oil products but exclude fresh food prices, fell 1.0 percent in June from a year earlier, less than in May and a little less than a median market forecast of 1.1 percent. Analysts expect declines to slow further, but they say a convincing reversal is still distant as wage growth remains slow and government stimulus will expire later this year.