Japan has reported weaker-than-expected economic data, underlining the challenges the government faces as it tries to revive the country’s economy.
Industrial output fell 3.3% in June, from the previous month. Compared with the same month a year ago it fell 4.8%.
Meanwhile, household spending declined 0.4% from a year earlier. Analysts had expected growth of 1.0%.
Japan has been trying to boost domestic consumption in an attempt to revive its stagnant economy.
Analysts said that while the data was weak and highlighted the challenges faced by the government, it was not a cause for immediate concern.
“This is a minor blip, the overall trend is that of a recovery in Japan’s economy,” said Masaaki Kanno, Japan chief economist with JP Morgan Securities.
Japan has reported weaker-than-expected economic data, underlining the challenges the government faces as it tries to revive the country’s economy
PM Shinzo Abe’s government has unveiled a series of aggressive measures to boost domestic demand, which has been hurt in part by years of falling prices or deflation.
While falling consumer prices may sound good, they tend to hurt the economy as consumers and businesses put off big purchases in the hope of getting a better deal later on.
Policymakers and analysts have said that ending the deflationary cycle is the key to reviving Japan’s economy.
Earlier this year, the central bank doubled its inflation target to 2% in an attempt to boost consumer prices and spending.
There have been some indications that the steps are having an impact as data released last week showed that consumer prices rose in June, for the first time in more than a year.
The decline in Japan’s factory output was also bigger than forecast.
However, analysts said that the fall was likely to be temporary and predicted that production would jump in the coming months,
“Although June data for factory output was weak, manufacturers’ forecasts for July are strong,” said Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute.
“I think there is no change in the trend that production is expected to stay on a steady recovery as June trade data was good, benefits from the yen’s weakness are appearing and domestic demand is solid.”
According to a survey conducted by Japan’s Ministry of Economy, Trade, and Industry (METI), manufacturers expect production to rise by 6.5% in July.
Japan’s economy contracted in the third quarter of 2012, as a global economic slowdown and anti-Japan protests in China hurt its exports, while domestic consumption remained subdued.
Japan’s gross domestic product (GDP) contracted 3.5% from a year earlier.
Compared with the previous three months, the economy contracted 0.9%.
The weak data is likely to put pressure on the government to boost stimulus measures to spur growth.
“There are risks from both domestic and external factors,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
“As such, the Bank of Japan [BOJ] will stand ready to ease monetary policy again, and it would not surprise me if the BOJ eased again by the end of this year.”
Japan’s economy, the world’s third-largest, has been trying to recover from last year’s earthquake and tsunami, which caused widespread destruction in the country.
However, its recovery has been hampered by a combination of factors.
A slowdown in key markets, such as the US and eurozone has hurt demand for its exports, one of the biggest drivers of Japanese growth.
Slowing growth and anti-Japan protests in China – Japan’s biggest trading partner – have further impacted its export sector.
To add to its woes, the debt crisis in the eurozone and weak recovery in the US have seen many investors flock to safe-haven assets such as the yen, resulting in the Japanese currency strengthening against the US dollar and the euro.
The yen has risen 5% against the US dollar since March this year and 8.5% against the euro during that period.
That makes Japanese goods more expensive for American and European consumers, hurting the earnings of the country’s exporters.
To make matters worse, attempts by policymakers to boost domestic demand have had little effect. Private consumption fell 0.5% in the July to September quarter, from the previous three months.
Analysts said that given these factors the economy was likely to shrink further in the current quarter and enter a technical recession.
“The decline in exports seems large. Consumption and capital expenditure were also weak, showing that both external and domestic demand are weak,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.
“Economic data deteriorated sharply from September, and this means Japan is already in recession,” he added.
Faced with slowing external and domestic demand, Japan’s central bank has taken various steps to try and spur growth.
Earlier this month, the BOJ extended its asset purchase programme by 11 trillion yen ($138 billion). Under the programme, the central bank buys bonds to keep long-term borrowing costs down.
It also said that it will offer unlimited loans to banks to encourage lending in an effort to boost domestic consumption.
However, analysts said the measures were unlikely to have a major effect, not least because firms were holding back expansion plans in the wake of an uncertain economic environment.
“There is very little demand for credit. In fact Japanese firms are holding back on capital expenditure,” said Junko Nishioka, the chief economist of RBS Securities in Tokyo.
Junko Nishioka added that policymakers instead needed to focus on measures that will help weaken the yen, as the uncertain global economic environment was likely to see the Japanese currency, which is seen by some as a safe-haven asset in such times, remain strong.