Japan Industrial Production Falls at Fastest Pace Since 2011 Earthquake

A man walks inside a factory at Keihin industrial zone in Kawasaki, south of Tokyo

Japan's industrial production declined 3.3% on month in June, as the country's sales tax hike prompted consumers to cut spending, leading to lower domestic consumption.

Japan's ministry of economy, trade and industry said industrial production in June declined 3.3% from the previous month and 3.2% from the previous year.

The monthly decline is the biggest for the economy since the 2011 earthquake and tsunami.

Transport equipment, general-purpose, production and business oriented machinery, information and communication electronics equipment industries contributed largely to the decline, according to the ministry.

Shipments declined for the sixth consecutive month, falling 1.9% on month in June. Meanwhile, inventories in June increased 1.9% from the previous month, showing an increase for the second consecutive month.

Sales Tax

Japan increased its sales tax from 5% to 8% in April in order to generate more revenues and pare its huge public debt. As a result, goods became more expensive in the country and consumers started to reduce their spending.

On 29 July, the country reported a 0.6% year-on-year decline in June retail sales. In addition, household spending figures also declined in recent months.

Ahead of the tax hike, businesses and individuals boosted their spending, resulting in weaker demand in recent months.

"The pent-up demand ahead of the sales tax hike was bigger than expected so the consequent downturn is pretty steep, which is probably why output fell so much in June," said Junko Nishioka, chief Japan economist at RBS Securities.

"We don't expect output to keep falling in the current quarter as the tax hike effect is fading. Still, the slow pace of recovery in exports may weigh on output."

Manufacturers surveyed by the ministry expect output to rise 2.5% in July and 1.1% in August.