Factory output jumped at the fastest pace in nearly four years in January as companies ramped up spending at home and won more orders in emerging markets, suggesting that exports will keep the economy on track for a moderate recovery. But the soft consumption readings underscore the unevenness of the recovery and pose a headache for the Bank of Japan, which hopes its aggressive money printing will drive up inflation expectations and prompt households to spend more.
"If consumer spending doesn't pick up by April, it will be difficult for industrial production to accelerate," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. Separate data underscored the dilemma the central bank faces with inflation almost grinding to a halt on slumping oil prices, moving further away from the BOJ's ambitious target of reaching 2 percent around the next fiscal year beginning in April.
BOJ Governor Haruhiko Kuroda defended his two-year timeframe for achieving the target on Friday, warning that adopting a relaxed approach to the deadline would undermine efforts to defeat deflation. But analysts are deeply sceptical of whether the BOJ can meet its goal, as they expect it to take at least six months for the benefits of lower oil prices to boost growth, assuming consumers will spend the money they save on their fuel bills.
The weak consumer mood has kept a lid on spending as wages have yet to increase enough to make up for the sales tax hike last April, casting doubt on the strength of the recovery. Household spending fell a more-than-expected annual 5.1 percent in January in the 10th straight month of declines, the longest losing streak since the global financial crisis in 2009. Annual retail sales dropped a worse-than-expected 2.0 percent. In a glimmer of hope, factory output jumped 4.0 percent in January, exceeding a 2.7 percent gain expected by economists and the biggest increase since 2011.
"Output is showing signs of an export-led recovery" as solid US demand acts as a driver of global growth, said Hiroshi Watanabe, senior economist at SMBC Nikko Securities. "This virtuous cycle of factory activity will continue to underpin Japanese output and capital spending ahead." Solid US growth is encouraging exporters of electronics and cars, such as Nissan Motor Co, which is trying to boost shipments from Japan to benefit from the weaker yen.
"I can't (give) you concrete numbers now but we have already started to work on how we can capitalise on the available capacity in Japan for North America," said Jose Munoz, executive vice president at Nissan and chairman of its North American arm. For the whole Japanese auto industry, however, sales are steadily falling due partly to April's sales tax hike.
Manufacturers surveyed by the ministry expect output to rise only slightly in February and fall 3.2 percent in March, as overseas orders for machinery and electronic parts peak from current very high levels, a ministry official told reporters. The mixed data will keep the BOJ under pressure to maintain its stimulus, although Governor Haruhiko Kuroda has stressed he saw no need to ease policy again soon. Stripping away the effect of last year's tax hike, the core consumer price index - which excludes volatile food but includes oil costs - rose just 0.2 percent in January year-on-year, less than expected and slowing from 0.5 percent in December.