Analysts say implementation of sales tax increase negatively impacted Japanese manufacturing companies, reports Team IFM
Tokyo, June 13: The Japanese government has revised its reading for April’s industrial production, saying the decline was sharper than had been initially estimated, official data show, confirming an independent analysis that said the rebound seen in the previous month was short-lived and that factory output plummeted thereon.
Data from the Ministry of Economy, Trade and Industry (METI) released on Friday showed industrial output tumbled 2.8 percent in April from the preceding month, a brisker pace of slide than the preliminary projection of a 2.5 percent decline. In March, output had posted a recovery to log 0.7 percent increase.
In fact, the March show was actually commendable following an unexpected plunge of 2.3 percent in industrial output the month before, as compared to January production. This nosedive, the sharpest in eight months, went the opposite way of a median estimate of 28 economists, who had predicted a 0.3 percent gain.
February’s steep fall has been attributed to disruptions due to heavy snowfall, and for April, analysts have pointed to the three percentage-point increase in sales tax that came into effect at the start of the second quarter.
Manufacturers started gearing up for a decline in demand, which led to inventories shrinking for the seventh month in succession. Retail sales also plunged at its briskest pace in April, triggered primarily by the 5-8 percent sales tax hike imposed by the Abe Shinzo government to raise welfare funds.
The METI data for March had pointed to a rosier future, but economy tracker Markit had said its survey found factory output tumbling to the greatest extent in April since last December, with new orders falling for the first time in 14 months.
“As was expected, the implementation of the increase in the sales tax negatively impacted on Japanese manufacturing companies,” said Amy Brownbill, the economist who authored the Markit survey report.
The unforeseen decline in spending in April coupled with a slowdown in factory activity could have an impact on the monetary policy of the Bank of Japan (BoJ).
Reuters said that according to Hidenobu Tokuda, senior economist at Mizuho Research Institute, spending will recover from May.
“But sales of durable goods look weak and this could be a drag on overall spending,” Tokuda was quoted by Reuters as saying. “The government can afford to let the spending in its stimulus package run its course. The BOJ doesn’t need to move now, but it needs to keep an eye on the situation.”
DOWNWARD REVISION
Meanwhile, in an endorsement of Markit’s analysis, METI said mining and manufacturing output too fell 2.8 percent in April, the rate of decline registered by the overall industrial sector.
According to the ministry’s data, manufacturing output of iron and steel fell 0.3 percent, while that of electronic parts and devices decreased 5.3 percent.
Overall, the output in Japan’s factories and mines dropped a seasonally adjusted 2.8 percent in April from the previous month, reflecting a downward revision from the initially reported 2.5 percent decrease.
The ministry’s index for industrial production came to 99.3 against the base of 100 for 2010, and the government attributed the downgrade mainly to sluggish production of alcoholic beverages, which was not reflected in the preliminary report released May 30.
On an annualised basis, industrial output was revised to reflect an ascent of 3.8 percent, down from the initial estimate of an increase of 4.1 percent. This came on the heels of an increase of 6.4 percent posted in March.
Both shipments and inventory slid 0.5 percent in April as compared to March, with both remaining unrevised from the preliminary estimates.
April’s show was a bit of a dampner after revised METI estimates showed a month-over-month industrial production growth of 0.7 percent in March.
The data for March prompted Prime Minister Abe to assert Japan would reach the 2 percent inflation target, and promised more policy steps and stimulus packages to prop up the economy if needed.
Japan’s GDP jumped to 5.9 percent in the first quarter, much above analysts’ forecast of 4.2 percent.
FACTORY DAMPNER
In April, according to Markit, manufacturers saw output and new orders declining, both falling for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax.
Alongside, the month also saw the highest rate of growth in payroll numbers since February 2007. Both prices charged and input prices rose in April, with selling prices increasing marginally following a decline in March.
Markit’s manufacturing PMI posted at 49.4 in April, down from 53.9 in March. “This was the first time in 14 months that the Japanese manufacturing sector saw deterioration in business conditions,” Markit said. “Output fell to the greatest extent seen since December 2012.”
The main contributor according to anecdotal evidence was a decline in demand. Indeed, similar to output, new orders decreased, with evidence suggesting the increase in the sales tax was the main factor behind lower new orders, as clients had brought forward purchases in March to avoid paying additional costs the following month.
Alongside, new export business also fell. “The rate of decline was marginal in April, but nonetheless the first reduction recorded in eight months. Solid decline in work outstanding was observed,” Markit said.
Buying capacity declined sharply in April and at the fastest pace since December 2012. Firms commented on a decrease in purchasing activity because of a drop in new orders.
In contrast to the majority of the indexes, Japanese manufacturers saw employment growth for the ninth month running. Moreover, the rate of job creation quickened to the sharpest pace since February 2007 as companies took on extra staff in anticipation of future workload growth.
“Output and new orders both fell for the first time in 14 months,” said Markit economist Brownbill. “In both cases, Japanese manufacturing companies linked the reductions to the increase in the sales tax.”
Brownbill referred to payroll numbers that increased at a faster rate than in March and was the sharpest since February 2007.
“It will be interesting to see whether the increase in the sales tax will continue to have a negative impact on Japanese manufacturing activity in the future months or whether the effects will only be short lived,” she said