Japan factory output falls as supply snags add to risk of economy shrinking

TOKYO • Japan's factory output fell for a second straight month in January as supply shortages continued to hurt manufacturers, adding to concern that the economy could shrink this quarter as Omicron restrictions weigh on activity.

Production slipped 1.3 per cent from the previous month, with output falls at carmakers making the biggest contribution to the drop, according to the Industry Ministry yesterday. Economists had expected a decline of 0.7 per cent.

A separate report by the ministry showed that retail sales fell 1.9 per cent in January from the previous month compared with economists' forecast of a 1.2 per cent decrease. The weakness in sales shows consumers were less willing to spend than expected amid the country's biggest Covid-19 wave.

The continued decline in output suggests a further delay in Japan's economic recovery, with the outlook further clouded by the Russian invasion of Ukraine and the potential fallout for global trade and commodities markets.

While the consensus among economists before yesterday's data was for Japan to still eke out growth in the first three months of this year, the country is lagging behind its peers in recovering to pre-pandemic levels. Further signs of a setback in momentum could spark calls for Prime Minister Fumio Kishida to take more action to shore up growth ahead of an election in the summer.

Considering the fragile state of the economy and the still feeble strength of inflation, the Bank of Japan is likely to stick with its stimulus measures, despite speculation that it may consider adjusting policy as its global peers make hawkish moves.

Japan's biggest automakers were forced to make production cuts in January due to supply constraints triggered in part by the spread of the Omicron Covid-19 variant at home and abroad, leading to a 17 per cent fall in output from the car sector compared with December.

Separate figures show that Toyota Motor's domestic output fell 32 per cent in January from a year earlier, as chip shortages and Covid-19 disruptions hampered Japan's biggest carmaker. Nissan Motor's production fell by 25 per cent.

While the Omicron impact on supply chains should ease in the coming months, the Russian invasion has joined the list of concerns for manufacturers.

"The rapid spread of Omicron infections and higher commodity prices due to supply problems related to Ukraine risks will probably weigh on output," said Bloomberg Economics analysts.

Omicron impacted January retail sales as the sudden escalation of cases discouraged shoppers from spending. The weak result suggests the hit to consumption from Omicron could be larger than feared.

Policymakers will be closely watching to see how Japan's sharply rising energy costs are affecting consumers known for their deflationary mindset.

Without a strong recovery in consumer spending this quarter, Goldman Sachs and UBS are among those that expect the economy to shrink.

Mr Kishida said last Friday that he will ramp up support for households and businesses to mitigate the impact of surging oil prices.

Some economists, including Mr Kazuma Maeda of Barclays, see a good chance that the Prime Minister will unveil another economic package before the election.

Still, Omicron restrictions on activity may be hampering the implementation of existing stimulus measures from Mr Kishida's larger-than-expected economic package announced in November.

BLOOMBERG