Japan's services output shrank by 0.1% in August

Following even more sluggish industrial production results.

The recently released services output data of Japan was noted as very disappointing, and in month-on-month (sa) terms, services output shrank further by 0.1% in August.

According to a research note from DBS, the July reading was also revised down to a negative 0.3%.

The weak services data came after the even more sluggish results in industrial production, which showed a notable decline of 1.5% in Aug.

For the entire period of Jul-Sep, the possibility is increasing that total output growth will fall into the negative territory.

Accordingly, risks are also increasing that GDP growth will register the second consecutive quarter of contraction in 3Q, matching the definition of a technical recession.

Here’s more from DBS:

Interestingly, the demand side indicators are faring better than the supply side ones. Retail sales increased in Aug. Machine orders and construction orders both bounced back.

Export growth also picked up to 7.5% (YoY) in the first 20 days of Sep from -3.3% in the same period of Aug.

The disparity between the demand and supply data should be explained by the heavier-than-expected destocking amongst manufacturers and services providers.

What’s worth highlighting here is that domestic final demand has started to recover from the slump caused by the sales tax hike.

With demand improving, destocking should come to a halt and inventory rebuilding will eventually be necessitated.

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An extended fall in GDP growth in 4Q could be avoided. And the risks of a real recession are judged to be low.