Japan September factory output beats forecasts, but retail sales disappoint ahead of BoJ

The data give the BoJ evidence on both sides, so the reaction in the yen and Japanese government bonds is likely to be modest ahead of the policy decision and Outlook Report later in the day. Stronger output and upbeat production plans support Japanese industrials and exporters. Softer retail sales could weigh on consumer-facing stocks if the weakness persists. The production upgrade suggests manufacturers are looking through high energy costs for now, but further gains in oil prices tied to the Iran conflict would squeeze margins and household spending power at the same time.

BoJ preview: hold at 1.25% expected, with 2% inflation call and dissent risk in focus

Japan’s factories are firing up while its shoppers are holding back, leaving the BoJ with one more mixed signal on a crowded morning.

September industrial output rose 2.2% m/m, beating the 1.3% forecast, after a 2.4% drop in August

Manufacturers expect output to rise 5.1% in October (previously forecast at 3.1%) and 0.8% in November

Retail sales fell 0.7% m/m, a second straight monthly decline

Retail sales rose 2.3% y/y, short of the 3.3% expected and down from 2.9%

The data land ahead of the BoJ decision, with a hold at 1.25% expected

Japan’s factory output rebounded more strongly than expected in September, but retail sales fell short of forecasts. That gives the Bank of Japan a mixed picture of the economy just hours before it announces its policy decision on Friday.

Industrial production rose 2.2% from August, well ahead of the median forecast for a 1.3% gain in a Reuters poll, and reversed much of the 2.4% drop recorded the previous month. Compared with a year earlier, output was up 1.9%, slower than the 2.7% annual pace in August.

The outlook from manufacturers was notably upbeat. Companies surveyed by the Ministry of Economy, Trade and Industry expect seasonally adjusted output to jump 5.1% in October, a sharp upgrade from the 3.1% increase they had forecast a month earlier, before rising a further 0.8% in November. If those plans are met, factory activity would gain considerable momentum heading into the final weeks of the year, although manufacturers’ forecasts are often revised once actual production data are released.

Consumer spending was weaker. Retail sales fell 0.7% in September from August, a second consecutive monthly decline following a 1.2% drop in August. On an annual basis, sales rose 2.3%, short of the 3.3% expected and below the prior month’s 2.9% pace.

The split between strong production and softer spending is likely to feature in the central bank’s assessment. Policymakers are widely expected to keep the policy rate at 1.25% later on Friday, with markets focused on whether the board signals a hike in December. Robust output and a firm upgrade to production plans would support the view that the economy can withstand further tightening. Slowing retail sales, on the other hand, point to pressure on household budgets from higher prices.

The figures land on the same morning as Tokyo inflation data that showed core consumer prices in line with expectations. The BoJ’s quarterly Outlook Report, due later in the day, will show how policymakers weigh the latest signals on growth and inflation.

This article was written by Eamonn Sheridan at investinglive.com.