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Economy

Japan downgrades industrial outlook for first time in 40 months

China slowdown hurts output of memory chips and smartphone components

Japan's exports of semiconductors to China have suffered from the Chinese economic slowdown. (Photo by Wataru Ito)

TOKYO -- The Japanese government on Thursday downgraded its monthly assessment of industrial output for the first time in more than three years, prompted by a drop in exports to China's slowing economy.

The Cabinet Office's economic report for February says "weakness can be seen in some areas" of production, qualifying a view of moderate growth that had been kept unchanged since October 2015.

February's report also downgraded the assessment on corporate profits. It follows January's downward revision on exports, which are now described as "almost flat," and raises doubts about the durability is poised to become Japan's longest postwar economic expansion.

The sluggishness in production reflects a slowdown in overseas shipments of electronic components, especially in semiconductors, long a mainstay of Japan's export sector. 

Output has grown soft for memory chips and charge-coupled devices, a part found in smartphone cameras. Global capital investment in semiconductors is expected to drop this year from 2018 levels.

Japanese exports to China sank 17% on the year in January, falling for a second straight month. China, a major importer of electronic components, logged the slowest economic growth in 28 years in 2018. As the trade war with the U.S. began to hit home last fall, Chinese production of smartphones, automobiles, robots and other key products slumped.

Falling exports and production have hit Japanese manufacturers' earnings. "Corporate profits improvement appears to be pausing, although they remain at a high level," the February report reads, based on October-December results for listed companies. This marks the first downgrade in 32 months to an assessment that had read "corporate profits are improving."

The February report describes the Japanese economy as "recovering at a moderate pace," a view that has held steady for 14 consecutive months. "The overall trend of moderate expansion in production activity has not changed," Economic Policy Minister Toshimitsu Motegi told reporters Thursday. As proof, Motegi pointed to continued improvement in job numbers and incomes, and said consumer spending is recovering.

Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities, says a stock market recovery and an anticipated rise in public works investment are some of the factors underpinning the Japanese economy. "These are not conditions that warrant a major downgrade in the assessment," said Shimanaka.

Other observers note risks to the economy going forward. Takashi Miwa, chief Japan economist at Nomura Securities, says while domestic demand "remains firm," Japan's exports "track China's economic growth rate."   

Nomura forecasts Japanese exports in fiscal 2019 to fall by a wider margin than previously expected, owing to what looks to be a continued slowdown in China in the first half of this year.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance, says that although it remains to be seen whether China's slump is temporary, "this is a critical moment for Japan's economy."

In February's report, the Cabinet Office downgraded its assessment of the global economy, adding Taiwan, the eurozone, Germany and the U.K. to China on the list of weaker economic outlooks.

"We will focus on trade problems, China's economic prospects and other risk factors," said Motegi.

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