Japan Heads for GDP Contraction as South Korea Weakens: Economy

Japanese and South Korean industrial production fell more than economists estimated last month as slowdowns in China and Europe weighed on exports, building the case for more monetary easing.

Japan’s output fell 1.3 percent from July, the biggest decline in three months, a Trade Ministry report showed in Tokyo today. South Korean production slid 0.7 percent, partly on a strike at Hyundai Motor Co.

An increasing risk that Japan’s economy will shrink this quarter and the failure of central bank loosening to dislodge deflation may increase pressure for officials to ease at either of two meetings next month. Today’s data add to China’s weakest industrial production growth in more than two years in highlighting the failure of policy support to reverse a slowdown across Asia.

“I’m convinced we’ll see a contraction in Japan’s GDP this quarter because consumption, exports and private investment are falling,” said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo and a former central bank official. “Prices in Japan are falling because the economy is weak.”

The Nikkei 225 Index fell 0.7 percent as of 1:20 p.m. in Tokyo. The MSCI Asia Pacific Index of stocks was up 0.2 percent as investors weighed threats to the region’s growth against prospects for more stimulus.

A report due tomorrow from HSBC Holdings Plc and Markit Economics may indicate that Chinese manufacturing contracted for an 11th month in September. Baoshan Iron & Steel Co., China’s largest listed steelmaker, said this week it suspended production at a plant after demand fell for slabs used in ships and bridges.

Cutting Rates

Economists had expected declines of 0.5 percent in Japan’s output and 0.4 percent in South Korea’s, according to the median forecasts in surveys by Bloomberg News.

South Korea will need to cut interest rates again next month to avoid rapid gains in the won as a result of easing elsewhere, said Kim Hyeon Wook, an economist at SK Research Institute and a former adviser to the Bank of Korea’s monetary policy committee. Kim said the Hyundai strike affected output and a slowdown in car exports will be “bad for Korea.”

Japan’s consumer prices excluding fresh food fell 0.3 percent in August from a year earlier, matching the steepest decline in 16 months, another report showed today. The nation’s jobless rate slid 0.1 percentage point to 4.2 percent as more people stopped seeking jobs. Retail sales rose 1.8 percent from a year earlier.

China, Europe

“Asian exports and production are weakening due to slowdowns in China and Europe,” said Glenn Levine, a senior economist at Moody’s Analytics in Sydney. “Today’s data make it more likely that Japan’s economy will contract this quarter.”

JPMorgan, Barclays Securities Japan and BNP Paribas SA expect a contraction in Japan after growth slowed to a 0.7 percent annual pace in the second quarter. Challenges span political tensions with China, the fading effects of car subsidies and strength in the yen. The Japanese currency traded at 77.55 per dollar as of 1:17 p.m. in Tokyo, near the seven- month high of 77.13 touched on Sept. 13.

Toyota Motor Corp. (7203), Nissan Motor Co. (7201) and Honda Motor Co. (7267) reported this week that August production fell in China after anti-Japanese protests flared in the world’s largest vehicle market. Toyota also said this week it will adjust production at a plant in Kyushu, southwestern Japan.

Japan’s trade ministry today cut its assessment of industrial output for the first time since June and said that it was in a weakening trend. Finance Minister Jun Azumi said that export demand is very unstable.

Carbon Tax

The Japan Business Federation, known as Keidanren, says that a planned carbon tax will add to energy costs and further slow economic growth. The levy, aimed at curbing greenhouse gases, will start Oct. 1 at 289 yen ($3.73) a metric ton of emissions.

Signs that a global slowdown is undermining a Japanese recovery prompted the central bank to unexpectedly expand its asset-purchase fund last week. Bank of Japan (8301) Governor Masaaki Shirakawa and his colleagues gather to set policy twice next month, on Oct. 4-5 and Oct. 30, with Deputy Governor Hirohide Yamaguchi saying this week that the bank will take “bold steps” if necessary.

Around the world, France will today give a final reading for second-quarter GDP, while Germany will report on retail sales. Inflation data will be released for the euro region and Italy. In Canada, a report may show the nation’s economy grew 0.1 percent in July from the previous month.

U.S. data may show that personal spending climbed in August after a pickup in automobile purchases and increased in gasoline prices, according to a Bloomberg survey. The Commerce Department’s report also may show the slowest gain in incomes in four months as the labor market struggled.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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