Japan factory output posts biggest fall in 8 months on weak auto, chip sectors

TOKYO – Japan’s factory output shrank at the fastest pace in eight months in January as declining overseas demand took a heavy toll on key industries such as auto and semiconductor equipment.

In contrast, retail sales posted their fastest growth in nearly two years, separate data showed, highlighting the divergent paths between soft manufacturing and robust service sector activity.

“Weak export-bound production and a recovery in consumption continue to be the two main focuses of Japan’s economy,” said chief economist Atsushi Takeda at Itochu Economic Research Institute. He expects the Bank of Japan (BOJ), with its incoming new leadership, to be slow in tweaking monetary policy amid the uncertainty.

Factory output fell 4.6 per cent in January from a month earlier on a seasonally adjusted basis, government data showed on Tuesday. The contraction was much larger than economists’ median forecast of a 2.6 per cent decline and followed an upwardly revised 0.3 per cent increase in December.

It marked the fastest decrease since May 2022’s 7.5 per cent fall, when China’s Covid-19 lockdown disrupted Japanese manufacturers’ supply chains.

Output of auto products slumped 10.1 per cent, dragging the overall index lower, while manufacturing of items such as production machinery and electronic parts dropped 13.5 per cent and 4.2 per cent respectively.

Semiconductor-making equipment was down 26.8 per cent as chip firms slowed their capital expenditure, while passenger cars fell 7.4 per cent due in part to a component supply bottleneck caused by heavy snow across Japan, a Ministry of Economy, Trade and Industry (Meti) official told reporters.

The United States-led export control of chip equipment against China did not have “an immediate effect” on Japanese industrial production in January, the official added.

“The magnitude of the slowdown was partly due to the early start to the Chinese New Year this year, which started just 22 days after the turn of the calendar year,” said Mr Darren Tay, Japan economist at Capital Economics, adding that production will rebound in February.

Manufacturers surveyed by Meti expect output to rise 8 per cent in February and gain 0.7 per cent in March, the data also showed, although the official poll tends to report an optimistic outlook.

Separate data showed that Japanese retail sales rose 6.3 per cent in January from a year earlier, beating a median market forecast for a 4 per cent gain and posting an 11th consecutive month of expansion. It also logged the fastest growth since May 2021.

Despite the production cuts, retail sales of autos rose 19.3 per cent year on year, suggesting strong pent-up demand among domestic consumers caused by delivery delays.

Japan’s economy, the world’s third-largest, is expected to post an annualised 1.4 per cent expansion from January to March, according to a Reuters poll, after a weaker-than-expected 0.6 per cent growth in the final quarter of 2022.

Dr Kazuo Ueda, an academic nominated to become the BOJ’s next governor from April, has stressed the need to maintain the current ultra-low interest rates to support the fragile economy, while signalling the chance of tweaking the central bank’s long-term yield control scheme.

“As Ueda has said, Japan will not be able to escape deflation until the economic recovery is achieved,” said Itochu’s Mr Takeda.

“So he would not hurry policy tweaks that could give a strong shock to the economy, such as a sharp rise in interest rates.” REUTERS