Japan factory output slides, risks of recession rising

Japan’s factory output unexpectedly fell for the second straight month in August, fuelling worries the economy is slipping back into recession and raising more doubts about whether the government can reignite growth and end decades of deflation.

As a slowdown in China chills global growth, hitting export-reliant Asia particularly hard, analysts say the Bank of Japan may be forced to offer fresh stimulus as early as next month to get the faltering economy back on track.

"In the absence of growth engines due to weakness in external and domestic demand, the possibility is growing that the economy has shrunk for a second straight quarter in July-September and it may be slipping into a recession," said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

"Given weakening of the economy, the BOJ could ease policy again next month, even though Governor (Haruhiko) Kuroda remains bullish and the government is wary about further yen weakening boosting the cost of imports."

The economy shrank an annualised 1.2 per cent in April-June. August factory output fell 0.5 per cent month on month, trade ministry data showed on Wednesday, short of a 1 per cent increase expected by analysts.

Exporting industries led the decline. These included general-purpose machinery, cars and China-bound auto parts.

The cooling China economy has been adding to global deflationary pressures in the form of crumbling commodity prices.

The Bank of Japan has been pumping billions of dollars into the economy to spark inflation towards its 2 per cent goal by September 2016, and has remained adamant that prices will move up over time despite faltering external and domestic demand.