Friday, March 29

Japan’s Output Falls as Supply Snags Add to Contraction Risk


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(Bloomberg) — 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% from the previous month, with output falls at automakers making the biggest contribution to the drop, according to the industry ministry Monday. Economists had expected a decline of 0.7%.

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

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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 Monday’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 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 also likely to stick with its stimulus measures, despite ongoing speculation it may consider adjusting policy as its global peers make hawkish moves.

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Japan’s biggest automakers were forced to make production cuts in January due to supply constraints triggered in part by the spread of omicron at home and abroad, leading to a 17% drop in output from the car sector compared with December.

Separate figures show that Toyota Motor Corp.’s domestic output fell 32% in January from a year earlier as chip shortages and Covid disruptions hampered Japan’s biggest car maker. Nissan Motor Co.’s production also fell by 25%.

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

What Bloomberg Economics Says…

“The rapid spread of omicron infections and higher commodity prices due to supply problems related to Ukraine risks will probably weigh on output.”

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Asia Economist Team

Click here to read the full report.

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

Policy makers will also 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 who expect the economy to shrink.

The prime minister said Friday that he will ramp up support for households and businesses to mitigate the impact of surging oil prices. Some economists including Kazuma Maeda of Barclays see a good chance of Kishida unveiling another economic package before the election.

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

©2022 Bloomberg LP

Bloomberg.com

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