Strong factory output and weak retail sales give BoJ mixed economic signals

With signals pointing in opposite directions, the Bank of Japan faces a mixed data picture, likely leading to a muted reaction in the yen and government bonds before the policy announcement and quarterly Outlook Report. Upbeat production trends provide a lift for industrial exporters. On the other hand, a slip in retail spending could pressure consumer stocks if it continues. Manufacturers, for now, appear to be looking past elevated energy costs, though if oil prices rise further due to the conflict in Iran, both corporate margins and household budgets would feel the pinch.

Earlier:

• Tokyo's October inflation hit 2.8%, exceeding the consensus forecast of 2.7%.

Still to come:

• In the upcoming BoJ decision, the likelihood of a hold at 1.25% is dominant, but a push for higher inflation targets and a risk of dissent are on the agenda.

Japanese industry is accelerating, while consumers pull back, handing the central bank a further mixed indicator on a busy day of releases.

Key points at a glance:

• September factory output rose 2.2% month on month, surpassing the median estimate of 1.3% and recovering from a 2.4% fall in August
• Year on year, production increased by 1.9%, a deceleration from the 2.7% pace a month earlier
• Manufacturers project a 5.1% jump in October output, an upgrade from the 3.1% forecast in the prior month, followed by a 0.8% rise in November
• Retail sales dropped 0.7% on the month, marking a second consecutive fall
• Retail sales were up 2.3% year on year, below both the 3.3% consensus forecast and the prior month's 2.9%
• The figures arrive just ahead of the BoJ's rate announcement, where a hold at 1.25% is widely predicted

Industrial production in Japan rose sharply in September, exceeding market expectations, while retail sales recorded a weaker-than-forecast performance. The data presents the Bank of Japan with a conflicting view of the economy as it prepares to announce its policy rate decision later on Friday.

Month on month, industrial output climbed 2.2%, comfortably topping the 1.3% median Reuters forecast and clawing back a large part of August’s 2.4% decline. The annual rate came in at 1.9%, a slowdown from 2.7% during the previous month.

Manufacturers are expressing a notably positive outlook. Firms surveyed by the Ministry of Economy, Trade and Industry anticipate a 5.1% surge in seasonally adjusted output for October, well above the 3.1% increase they had estimated a month earlier, to be followed by an 0.8% gain in November. Achieving these targets would give factory output a solid push toward the end of the year, though such projections are frequently adjusted once real production data become available.

Spending by consumers painted a weaker picture. Retail sales declined 0.7% relative to August, the second straight month of contraction, following an earlier 1.2% drop. Compared with a year before, sales were 2.3% higher, falling short of the 3.3% forecast and slowing from August’s 2.9% pace.

This divergence between robust manufacturing and softer consumption is expected to be highlighted in the central bank’s analysis. Policymakers are forecast to maintain the policy rate at 1.25% on Friday, with attention among market participants fixed on any indication of a further rise in December. The healthy factory figures and the upgrading of production forecasts would tend to reinforce the argument that the economy could handle additional monetary tightening. Conversely, the deceleration in retail activity points to household finances being squeezed by higher costs.

The data arrived alongside Tokyo inflation numbers for October, which revealed core consumer prices broadly in step with predictions. The BoJ’s quarterly Outlook Report, scheduled for release later on Friday, will provide insights into how its board assesses the current signals regarding economic growth and price pressures.