TOKYO (Reuters) - Factories in Japan took another hit in December with the second-straight month of shrinking output, underlining a warning by the central bank about growing risks to the economy from slowing global growth and a Sino-U.S. trade war.
The dispute between the United States and China - Japan’s biggest trading partners - has already rippled across financial markets, businesses and trade.
Government data on Thursday showed a 0.1 percent decline in Japanese factory output last month. Though it was better than a median market forecast for a 0.4 percent decline and followed a 1.0 percent decrease in November, the outlook was far less clear.
Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to fall 0.1 percent in January and grow 2.6 percent in February, the data showed on Thursday.
Economists see factory activity remaining fragile and possibly deteriorating further as a slowdown in overseas economies pressures growth at home.
“The trend of output will be stagnant due mainly to slowdown in global economy and trade,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
The global pressure has put the Bank of Japan on the back foot, with policymakers expressing concern about the widening effects of a slowdown in China’s economy and the trade frictions, a summary of opinions at the bank’s January rate review showed on Thursday.
At the January meeting, the BOJ cut its inflation forecasts and maintained its massive stimulus programme in the face of mounting risks from the Sino-U.S. trade war.
The worries aren’t confined to just the BOJ. Many other central banks, including the Federal Reserve, have sat up and taken note of the broadening loss of global economic momentum.
At its rates-setting review on Wednesday, the Fed sent the clearest signal yet that its three-year drive to tighten monetary policy is close to an end.
Japanese policymakers fear the ripple effects of the Sino-U.S. trade war could undermine years of their efforts to foster sustainable growth. BOJ Governor Haruhiko Kuroda warned as much in recent comments.
The United States and China opened a pivotal round of high-level talks on Wednesday aimed at bridging deep differences over China’s intellectual property and technology transfer practices and easing their months-long tariff dispute.
Businesses are under pressure to safeguard margins and profits, with exports in December falling the most in two years due to plunging shipments to China, as the Sino-U.S. trade conflict weighs on global factory activity.
“We cannot rely on export-led recovery for the time being, while Japanese firms will turn cautious about capex and wage hikes. The situation surrounding Japan’s economy will be increasingly severe this year.” Norinchukin Research Institute’s Minami said.
December’s drop in factory output was led by decline in production machinery for items such as semiconductors and printing machine, and chemicals including cosmetics, the trade ministry said. It maintained its view on factory output, describing it as being in a “gradual pick-up”.
On the quarter, factory output grew 1.9 percent in the October-December period, posting its fastest gain since the start of 2014 when last-minute demand ahead of a sales tax hike helped boost factory activity.
The International Monetary Fund (IMF) trimmed its global growth forecasts and a survey this month showed pessimism increasing among business chiefs amid the trade tensions.
Japan’s economy, the world’s third largest, is expected to rebound from the third quarter contraction caused by natural disasters, but many economists say the rising external pressure will keep growth sub-par through 2019.
Reporting by Tetsushi Kajimoto; Editing by Sam Holmes & Shri Navaratnam