Japan's economy shows strain as factory output and retail sales drop

By Satoshi Sugiyama

TOKYO (Reuters) -Japan's factory output fell more than expected while retail sales declined for the first time in over three years in August, government data showed, heightening uncertainties about the economic outlook.

Although Tokyo struck a trade deal with Washington, analysts said U.S. tariffs could still affect Japan's production and the global economy, which is keeping the Bank of Japan on edge in terms of when to next raise rates.

Industrial output fell 1.2% in August from a month earlier, data from the Ministry of Economy, Trade and Industry (METI) showed on Tuesday, exceeding a median market forecast for a 0.8% decline.?

Manufacturers surveyed by the ministry expect seasonally adjusted output to grow 4.1% in September and rise 1.2% in October. The ministry maintained its assessment that industrial output is "seesawing."

"The cautious stance towards production planning remains deeply entrenched," a METI official said.

The production of electrical machinery and information and communication electronics equipment, including laptop computers, fell 5.7% in August from the previous month due to a reaction to pent-up demand in July. Fabricated metal production was down 7.8%.

In late July, Washington and Tokyo agreed upon a baseline 15% tariff on nearly all Japanese imports, down from an initial 27.5% rate on autos and a threatened 25% duty on most other goods, which came as a relief to Japanese exporters.?

Motor vehicle production, a key industry for Japan, was up 2.5% in August from a month earlier as the output for vehicle models for sale overseas increased and a parts shortage eased.

Still, analysts said it was too early to be optimistic.

"Japanese manufacturers are feeling squeezed on all sides," said Stefan Angrick, head of Japan and frontier market economics at Moody's Analytics. "Higher U.S. import tariffs under the U.S.-Japan trade deal are dragging down shipments."

BOJ Governor Kazuo Ueda said this month that the central bank will continue to raise interest rates if the economy and prices move in line with its forecast, although he said he preferred to scrutinise more data for clues on how U.S. tariffs could affect Japan's economy.

Separate data showed Japanese retail sales in August declined 1.1% from a year earlier, the first decline in 42 months, dragged down by lower automobile sales. The median market forecast expected a 1.0% rise.

"This dismal data streak will keep the Bank of Japan on hold for now," Angrick said.

(Reporting by Satoshi Sugiyama; Additional reporting by Yoshifumi Takemoto; Editing by Jacqueline Wong and Thomas Derpinghaus.)