Japan factory output shrinks again in August on China slowdown

Japanese factory production fell unexpectedly for a second month in August, data showed Wednesday as a slowdown in China and weak domestic spending hit Prime Minister Shinzo Abe's efforts to kickstart the world's number three economy.

The 0.5 percent contraction in industrial production followed a negative figure in July and missed market expectations for growth in output last month.

The disappointing data supplied the latest evidence that Abe's growth blitz, dubbed Abenomics, was faltering, after figures last week showed consumer prices fell for the first time in more than two years.

Abe's drive had appeared to offer the promise of a turnaround, but a slew of recent data suggests it is faltering.

Standard & Poor's cut its sovereign credit rating on Japan this month, saying the government has little chance of reinvigorating the moribund economy in the short term, with social welfare costs spiralling.

The factory output data revived speculation that the Bank of Japan will be forced to unleash more stimulus to counter the downturn.

Japan's economy contracted in the second quarter owing to a slowdown in key trading partner China, weak consumer spending at home and soft exports.

Scores of Japanese firms depend heavily on China, from automaker Nissan to factory robotics maker Fanuc.

"Today's data confirm that the economic recovery has ground to a halt," Marcel Thieliant from Capital Economics said in a commentary.

"We stick to our view that the Bank of Japan will step up the pace of its asset purchases next month."

The central bank's 80 trillion yen ($665 billion) annual asset-buying scheme -- similar to the Federal Reserve's quantitative easing -- was a key pillar of Abe policy, although he is struggling to make good on pledges to cut red tape and open up the economy.

A sales tax rise last year hammered consumer spending, denting demand for products made by Japanese firms which also faced slowing growth overseas.

"Production will probably stay subdued with weak exports amid concerns about overseas economies," Toru Suehiro, an economist at Mizuho Securities, told Bloomberg News.

"The downside risks to Japan's economy are increasing this quarter as both external and domestic demand look sluggish."

Abe last week pledged to refocus on his "Abenomics" growth project, saying the country's economy has entered "the second stage".

The programme helped sharply weaken the yen, sparking a stock market rally and lifting exporters' profits, but the impact on the wider economy has fallen short of expectations.

Focus would now to the BoJ's quarterly Tankan business confidence report on Thursday.

In July, the Tankan showed confidence among major Japanese manufacturers rose to the highest level in more than a year, but investors will be keen to see if firms have become more cautious as the economy struggles.