Workers check the machinery at the factory of aircraft component manufacturer Aoki in Higashiosaka
Workers check the machinery at the factory of aircraft component manufacturer Aoki in Higashiosaka, Japan June 22, 2022. Reuters

Japanese factories slashed output for a third consecutive month in November, dragged down by weak demand for machinery products amid a deteriorating global economic outlook.

The weak production bodes ill for Japanese firms as they face growing calls to raise workers' pay to counter inflation, seen as essential for the post-pandemic growth of the world's third-largest economy.

"The impacts of overseas rate hikes, slower growth and weak capital expenditure demand are gradually reaching Japan," said Masato Koike, economist at Sompo Institute Plus.

"Production inevitably remains weak for October-December and highly likely stalls furthermore as the global economy hasn't hit its worst."

Factory output fell 0.1% in November from the previous month, government data showed on Wednesday, a smaller decline than the median market forecast for a 0.3% drop.

That marked the third monthly decrease in Japanese production and followed a revised 3.2% fall in October and 1.7% contraction in September.

Output of general machinery slipped 7.9%, while that of production machinery decreased 5.7%, driving down the overall index in November. Output of auto products was also down 0.8%.

A Ministry of Economy, Trade and Industry (METI) official told a media briefing that machines to make semiconductors or flat-panel displays saw lower demand across overseas markets such as China, Europe and North America.

METI cut its assessment of industrial output for a second straight month, saying "production is weakening".

Manufacturers surveyed by METI expect output to gain 2.8% in December and decrease 0.6% in January, but production could continue falling, the official added, saying companies tend to downgrade their production plans afterwards in recent months.

Following a surprise contraction in July-September, economists expect Japan to grow an annualised 3.3% in October December on robust domestic demand, the latest Reuters poll showed.

But inflation at a four-decade high is testing the resilience of consumer spending. Japanese retail sales fell month-on-month for the first time in five months in November, official data showed on Tuesday.

Businesses are not sanguine either. Last week, the government warned of supply chain risks from China's COVID-19 surge, while the Bank of Japan (BOJ)'s surprise tweak to its yield control policy stoked uncertainties for some lenders.

Japanese companies head into annual labour talks for 2023 early next year. Substantial wage hikes are seen as necessary for the BOJ's exit from ultra-loose easing.

The wage hikes next year could end up "neither too high or too low", Sompo's Koike said, as strengthening prospects for pay raises are offset by a darker global economic outlook.

"Japan's real wages are unlikely to show extraordinary growth, which could prevent the BOJ taking drastic measures to exit monetary easing."