Japan’s output falls as US tariffs drag on global outlook

The latest US move signals that the trade war is far from over and could further strain the global economy and Japan’s even after Tokyo managed to get Washington to follow through with a deal on lower tariffs

Japan’s factory output fell for a second month in August as businesses remained cautious amid a global outlook clouded by US President Donald Trump’s ongoing tariff campaign.

Industrial production dropped 1.2% from the previous month, following the same pace of decline from July, the Economy Ministry reported Tuesday. The fall was led by metal products and electronic machinery, and was deeper than the median forecast of a 0.9% decline. Compared to a year earlier, output also fell more than expected.

The data reflect ongoing caution among manufacturers, as the US continues to threaten additional tariffs to narrow its trade deficit. Trump recently announced a fresh round of industry-specific levies targeting heavy trucks, patented drugs, kitchen cabinets and upholstered furniture.

The latest US move signals that the trade war is far from over and could further strain the global economy and Japan’s even after Tokyo managed to get Washington to follow through with a deal on lower tariffs. The agreement fixes US tariffs on Japan’s exports including cars at 15%.

“It’s becoming increasingly clear that companies are trying not to rely too heavily on exports to the US,” said Takafumi Fujita, economist at Meiji Yasuda Research Institute. “I think the sense of uncertainty will remain. The US-Japan agreement on universal tariffs and levies on cars and pharma is a relatively reassuring development. But at the same time Trump has been suddenly announcing additional threats.”

While the agreement with the US lowers the tariff from the initially proposed 25%, the 15% level remains much higher than the original rate. The elevated duties are expected to keep applying pressure on Japanese exporters, particularly automakers. Exports fell for the fourth consecutive month in August, led by cars and steel, signaling softer appetite for shipments.

Adding to domestic concerns is weak consumer spending. Separate data from the ministry showed that retail sales declined 1.1% in August from the previous month, compared to expectations for a 1.2% gain. While inflation is moderating, it still outpaces wage growth, limiting consumers’ purchasing power and dampening household spending. Retail sales also fell from a year earlier, led by cars, fuel and online commerce.

To cushion households from persistent inflation, the government is expected to announce additional relief measures this fall. The timing and contents will likely depend on the new prime minister, after the ruling Liberal Democratic Party chooses its new leader on Oct. 4. The leading candidates have pledged to roll out economic support measures if elected to ease the inflation burden on households.

Sluggish exports and factory activity continue to weigh on Japan’s economy overall, which is still searching for a strong growth engine. Many economists now forecast a contraction in the three months through September, following five straight quarters of expansion, a development that could prompt the central bank to proceed more cautiously with rate hikes.

In its latest policy statement, the BOJ noted that exports and production have remained “more or less flat,” with evidence of front-loading ahead of tariff increases, followed by a pullback. The central bank also warned of “downward effects due to tariffs” on the manufacturing sector.

The BOJ is scheduled to deliver its next policy decision at the end of October, with more than one-third of economists expecting a potential rate hike in a Bloomberg survey conducted ahead of the September policy meeting.

Governor Kazuo Ueda’s board kept its benchmark rate unchanged at 0.5% at the September gathering. The surprise dissension by the two board members who called for a rate hike and this week’s hawkish comments by a dovish board member have ramped up speculation that the central bank will move in October.

The outlook for production in the next few months is relatively optimistic, with manufacturers anticipating production to rise 4.1% in September and gain 1.2% in October. Further insight into business sentiment will come from the BOJ’s Tankan survey due Wednesday. Economists expect confidence among large manufacturers to improve slightly, despite an increasingly uncertain global backdrop.