Japan's industrial production came in slightly firmer than expected in August, being unchanged on the month after a drop in July and a rise in June, as higher output of gasoline and heating oil was offset by a pullback in automobile production that had been recovering steadily on improved supply chains, preliminary data released Friday by the Ministry of Economy, Trade and Industry showed.

From a year earlier, factory output marked the second consecutive fall amid slowing global demand but the decline was smaller than expected.

The METI's survey of producers indicated that output is expected to post a solid gain in September and rise further in October.

The ministry maintained its assessment after downgrading it for the first time in eight months in August for the July data, saying industrial output is"taking one step forward and one step back."

The METI said it will keep a close watch on the effects of downside risks to global economic growth and a rise in prices, warning about the drag from high interest rates in major economies except for Japan and China's slow recovery from its pandemic slump. It had removed the effects of materials supply shortages from its watch list last month.

Econoday's Relative Performance Index stood at minus 16, below zero, which indicates the Japanese economy is performing worse than expected after underperforming with a wider margin recently. Excluding the impact of inflation, the RPI was at minus 22.

Japanese policymakers believe the economy needs continued monetary and fiscal policy support to achieve sustainable wage growth and stable 2 percent inflation.

Industrial production was unchanged on the month in August on a seasonally adjusted basis, coming in firmer than the median economist forecast of a 0.8 percent fall (forecasts ranged from a 2.0 percent drop to a 0.2 percent rise). It followed a 1.8 percent fall (revised up from minus 2.0 percent) in July, a 2.4 percent rise in June and a 2.2 percent drop in May.

Of the 15 industries, 10 posted decreases from the previous month and five marked increases. The decrease was led by lower output of passenger cars and auto parts as well as steel and non-ferrous metal products (fiber-optic cables, etc.). Higher production was seen in refined petroleum products (gasoline, heating oil and naphtha) and electrical machinery (car lighting products, Xray equipment, etc.).

Based on its survey of manufacturers, METI projected that industrial production would rise 5.8 percent on the month in September (revised up from a 2.4 percent rise forecast last month) and rise a further 3.8 percent in October. Adjusting the upward bias in output plans, however, METI forecast production would still rise a solid 3.7 percent in September.

From a year earlier, the production index slumped 3.8 percent in August after falling a revised 2.3 percent in July, being flat in June and rising 4.2 percent in May, which was the first increase in seven months. It was smaller than the median economist forecast of a 5.4 percent fall (forecasts ranged from 6.6 percent to 4.3 percent drops).

The index of industrial production (100 = 2020) stood at 103.8 in August, unchanged from a revised 103.8 in July. It is well above the recent bottom of 87.6 hit in May 2020 but below 108.8 seen in January 2020, when the pandemic hadn't had a widespread impact yet. The index briefly jumped to 108.8 in April 2021, 109.0 in June 2021 and 107.8 in August 2022.

Japan's industrial production is forecast to post a second straight monthly decline, down 0.8 percent in August, after a revised 1.8 percent drop in July, hit by weaker global and domestic demand for semiconductor-producing equipment and despite continued recovery in the auto industry. A temporary shutdown at Toyota Motor's domestic factories on Aug. 29 caused by a computer system malfunction is believed to have trimmed overall production. From a year earlier, factory output is also seen marking a second consecutive fall, down 5.4 percent, following a revised 2.3 percent dip in July.

Industrial Production measures the physical output of the nation's factories, mines and utilities. Factories manufacture various products, and the industrial production indexes have been prepared as a comprehensive indicator of wide-ranging production activities for such products and are regarded as some of the most important among economic indexes.

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

Industrial production provides key industry data for this export-dependent economy. The data are issued twice a month-a preliminary estimate at the end of the month for the preceding month and a revised estimate about two weeks later. All products, whether sold domestically or abroad, are included in the calculation of industrial production. Industrial production is highly sensitive to the business cycle and can often predict future changes in employment, earnings and income. For these reasons industrial production is considered a reliable leading indicator that conveys information about the overall health of the economy. This report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.