Japan's August industrial output falls short of forecasts; retail sales growth decelerates

The shortfall in industrial output and the weaker retail figures make it harder to argue for another rapid move from the Bank of Japan, and market participants will assess those figures alongside the confidence expressed by manufacturers' own forecasts for September and October. A former executive director of the BoJ has pegged the probability of a rate increase in October at around 20% to 30%, meaning weaker data could push that estimate down, though the central bank's turn toward ensuring inflation does not overshoot cautions against reading too much into a single month. Any repricing is likely to show up first in the yen, given that hawkish expectations toward the BoJ have been part of the recent environment. September's data and the Tankan business survey will provide the next tests, indicating whether August was a temporary dip.

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Japan's August numbers fell short on both industrial production and retail sales, but the optimistic forecasts from manufacturers for the coming months leave the overall picture ambiguous.

Summary:

• Japan's industrial production declined 1.7% month-on-month in August (the forecast was for a +1.7% increase, and the July figure was revised to -0.2%). Year-on-year, output rose 3.4%, slower than the prior 3.9%.
• Retail sales fell 1.2% month-on-month after a 2.4% increase in July. On an annual basis, they grew 2.7%, missing the 3.3% forecast and down from a prior 3.7%.
• Manufacturers surveyed by METI project a 3.2% output rise in September and a 3.1% rise in October, a sharp reversal from the earlier September forecast of a 4.2% decline.
• The August output decline of 1.7% stands in contrast to the 6.4% rise manufacturers had anticipated for the month in the July survey.
• The BoJ raised its policy rate to 1.25% in September, the highest since 1995. A former executive director of the BoJ sees a 20% to 30% chance of another increase in October.

Japan's factory production decreased in August and retail sales growth decelerated, injecting a note of caution into an economy that had displayed some resilience in July. Data published on Wednesday indicated that industrial output dropped 1.7% from July, compared with a median market expectation of a 1.7% increase. This came after a 0.2% fall in July, revised from an initial estimate of a 0.1% rise. Year-on-year, output increased 3.4%, a deceleration from the previous rate of 3.9%.

Retail sales also lost momentum. Monthly sales dropped 1.2%, wiping out most of the 2.4% surge seen in July, when consumer spending had exceeded projections. Year-on-year, retail sales increased 2.7%, undershooting the 3.3% forecast and easing from a prior 3.7%, which itself had been lowered from an initial reading of around 4%.

Manufacturers struck a more optimistic tone. According to the Ministry of Economy, Trade and Industry (METI) survey, manufacturers anticipate a 3.2% rise in seasonally adjusted output for September and a 3.1% rise for October. This is a sharp turnaround from the prior forecast, which had expected a 4.2% drop in September. The August outcome also falls far short of the 6.4% gain manufacturers had forecast for the month in the July survey, illustrating how much these projections can deviate from actual results.

The figures come as the Bank of Japan continues to tighten its monetary stance. The BoJ raised its rate by 25 basis points to 1.25% in September, a level that is the highest since April 1995, in a 7-2 vote. Governor Kazuo Ueda stated that the central bank had entered a new phase, shifting its focus from coaxing underlying inflation toward 2% to preventing an overshoot. A former executive director of the BoJ told Bloomberg he sees a 20% to 30% likelihood of a further rate rise in October, earlier than many economists expect. The monetary authority's next policy meeting is scheduled for late October.

The manufacturing sector has also dealt with disruptions related to the US-Iran conflict, a factor that Investing.com had noted as a backdrop to Japan's July data. Whether August represents a temporary hiccup or a more fundamental slowdown should become clearer with September's production and retail figures and the Tankan business survey, which is due shortly.