Japan factory output rises, but slower than expected as US tariffs threat looms

TOKYO: Japanese factory output rose at a slower-than-expected pace in May, government data showed on Monday (Jun 30), as sweeping US tariffs were threatening to derail the country's already fragile economic recovery.

Industrial output rose 0.5 per cent in May from the previous month, data from the Ministry of Economy, Trade and Industry (METI) showed, less than a median market forecast for a 3.5 per cent rise.

Manufacturers surveyed by METI expect seasonally adjusted output to rise 0.3 per cent in June and fall 0.7 per cent in July.

"It's necessary to pay close attention to the worsening trend in sentiment (among manufacturers on) production planning," a METI official said.

Tokyo is scrambling to find ways to get Washington to exempt its automakers from automobile industry-specific tariffs of 25 per cent, which are severely impacting the country's manufacturing sector. Japan also faces a 24 per cent "reciprocal" tariff rate starting on Jul 9 unless it can negotiate a deal with Washington.

Motor vehicle production went up by 2.5 per cent and shipments jumped 10.5 per cent in May from a month prior, the data showed. Some manufacturers had moved up their shipments because of the tariffs, the METI official said.

The number of firms mentioning that the tariffs had an impact on their production or shipment increased slightly from April, the official said.

"Exports are likely to remain sluggish and production indices are expected to continue show weakness in response to the global economic slowdown," said Yutaro Suzuki, an economist at Daiwa Securities.

The hit from US tariffs could derail a lacklustre recovery in Japan's economy, the world's fourth largest. The economy shrank in January to March, the first contraction in a year, due to subdued private consumption.

The US tariffs also complicate the Bank of Japan's efforts to raise still-low interest rates and reduce a balance sheet that has ballooned to roughly the size of Japan's economy.

"The poor run of data will keep the central bank on hold for the time being," said Stefan Angrick, head of Japan and Frontier markets Economics at Moody's Analytics. "Until there's progress on US-Japan trade, Japan's manufacturers will remain in the doldrums, with few clear sources of support."