Japan’s industrial output rose at the fastest pace in more than a year in May on the back of higher car production, suggesting that growth is holding up despite fears manufacturers remain pressured by the US-China trade war.

However, economists said the long-term outlook for Japan’s factory output was less rosy, as the May increase likely stemmed from a rise in car production before a sales tax hike expected in October.

Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, said “expected rush-demand” for cars before the tax is scheduled to rise to 10% from 8% contributed to the solid May output.

Still, recent economic figures such as exports “are weak and we can’t be optimistic about the outlook given the slowdown in the global economy and demand for IT-related products,” he said.

Industrial production jumped 2.3% from April, the fastest month-on-month pace since February 2018. May’s median market forecast was 0.7%, after April saw a 0.6% rise.

The May data showed that higher production of car parts and machines used to make flat panel displays helped offset a decline for airplane parts.

Lifting car production was the launch of new models, a trade ministry official told reporters.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to fall 1.2% in June but increase 0.3% in July.

“Capital goods shipments climbed to a seven-month high which suggests that business investment continued to expand in the second quarter,” said Marcel Thieliant, senior Japan economist at Capital Economics.

Friday’s data batch follows a set of tepid indicators in recent weeks, including exports - which fell for a sixth month in May - and a manufacturing activity gauge, suggesting the economy is feeling increased pain from slower global growth.

The standoff between Washington and Beijing - front and centre at the just-starting Group of 20 summit in Osaka - has weighed on Chinese growth. That, in turn, hurts Japan because many of its producers rely on selling heavy machinery and electronic parts to Chinese factories.

In another source of concern, Japan’s inventories rose 0.6% in May from the previous month, with its index hitting 104.4 on a seasonally-adjusted basis, the highest since comparable data became available in 2013.

The latest data comes as the Bank of Japan (BOJ) is considering ramping up stimulus as trade and growth risks cloud the outlook for the export-reliant economy.

BOJ Deputy Governor Masazumi Wakatabe said on Thursday the central bank stands ready to ease monetary policy pre-emptively to fend off risks that could derail the economy’s path toward achieving its 2% inflation target.

The BOJ kept monetary policy steady last week.

The central bank’s closely-watched “tankan” survey, due on Monday, is expected to show big manufacturers’ sentiment worsened to nearly three-year lows in the June quarter, in the wake of slowing demand at home and abroad.

Separate data on Friday showed Tokyo’s core consumer prices (CPI) index, which includes oil products but excludes fresh food prices, rose 0.9% in June from a year earlier, compared with a 1.1% increase in May.

The jobless rate stood steady at 2.4% in May, while the availability of jobs slipped, government data showed.

The jobs-to-applicants ratio fell to 1.62 in May, slightly down from April and the median estimate of 1.63.

Meanwhile, Tokyo stocks fell on Friday as investors turned cautious ahead of much awaited talks between US and Chinese leaders on the sidelines of the G20 summit in Japan, with cyclical shares retreating before the weekend.

The benchmark Nikkei average dropped 0.3% to 21,275.92 points, having risen 1.2% on Thursday after a South China Morning Post report raised hopes Washington and Beijing might make progress in talks.

For June, the Nikkei rose 3.3% for the first monthly gain since April, though it was almost flat for the week.

US President Donald Trump said on Wednesday a trade deal with Chinese President Xi Jinping was possible this weekend but he is prepared to impose US tariffs on most remaining Chinese imports if the two countries don’t agree.

White House economic adviser Larry Kudlow told Fox News on Thursday that Trump’s decision on whether to impose new tariffs on a $300 billion list of nearly all remaining Chinese imports will depend on the outcome of Saturday’s meeting at the western Japanese city of Osaka.

Traders say investors unwound their positions in cyclical stocks ahead of the weekend and the Bank of Japan’s closely watched “tankan” survey, due on Monday.

Reuters