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By Kantaro Komiya
TOKYO (Reuters) - Japanese factories cut output slightly in December, capping the worst quarter for manufacturers since the onset of the COVID-19 pandemic, hit by stalling global demand and rising costs.
Although retail sales, a barometer of service-sector activity and consumer spending, rose more than expected, the faltering factory activity is ill-timed as companies face calls to hike wages to sustain Japan's post-pandemic recovery.
"Japan is nearing a recession if you look only at manufacturers, but solid non-manufacturers are underpinning the overall economy," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.
Industrial output fell 0.1% in December from the previous month, government data showed on Tuesday. The drop was less than the median market forecast for a 1.2% decrease and followed upwardly-revised 0.2% growth in November.
Outputs of items related to capital expenditure such as general machinery and metal products, which dropped 6.0% and 3.0%, respectively, dragged down the overall December index. Output of auto products was up 0.6%, posting first growth in two months.
Compared with the previous quarter, factory output fell 3.1% in October-December, the first drop in two quarters. The fall was biggest since April-June 2020's 16.8% decline, when the impact of the pandemic first fully hit the world's third-largest economy.
Graphic: Factory output drops slightly https://www.reuters.com/graphics/JAPAN-ECONOMY/OUTPUT/gkplwdmowvb/chart.jpg
Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expect output to remain flat in January and increase 4.1% in February, the data also showed, although the official poll tends to report an optimistic outlook.
Separate data showed on Tuesday Japanese retail sales rose 3.8% in December from a year earlier, beating a median market forecast for a 3.0% gain and its tenth straight month of expansion.
Japan is set to downgrade its disease classification of COVID-19 to a lower level equivalent to the seasonal flu in May, Prime Minister Fumio Kishida said on Friday, raising hopes for further economic normalisation coupled with a tourism reopening.
The jobless rate stayed unchanged at 2.5% in December, another official data showed. Jobs-to-applicants ratio, a gauge of job availability, was also flat from the previous month that posted the highest reading since March 2020.
With a tightening labour market, 41-year-high consumer inflation and policymakers' pleas, more than half of big Japanese companies are planning to raise wages this year, a Reuters survey showed this month.