Plunging Output Adds to Japan Recovery Headwinds Before Election
Japan’s Factory Output Drops Steeply as Nation Heads to Polls
(Bloomberg) -- Japanese industrial production fell for a third straight month in September, deepening the worst quarterly slump for the country’s manufacturers since the height of the pandemic and weighing on the recovery before national elections this weekend.
Sliding output at Toyota Motor Corp. and other carmakers sent factory production down 5.4% from August, an economy ministry report showed Friday. The drop was twice as steep as the median estimate from analysts.
Sharper production falls amid global supply shortages weaken a key pillar of Japan’s recovery and will likely weigh on third quarter growth. It could also put more pressure on Prime Minister Fumio Kishida to boost the size of a stimulus package he’s pledged to deliver after Sunday’s general election.
“The car industry is key for Japan’s economy, so the slowdown could have ripple effects,” said economist Takeshi Minami at Norinchukin Research Institute. “As long as production is weak, exports will remain sluggish,” he said, adding that output forecasts suggest the worst could be over soon.
The Bank of Japan on Thursday downgraded its view on exports and production and cut its projection for growth this fiscal year, while bumping up its view of next year’s expansion. The BOJ said the supply constraints and developments in overseas economies are now among the main risk factors for Japan’s economy.
A separate report Friday showed consumer prices in Tokyo held just above zero in October for a second month, missing estimates and underscoring the different challenge facing the BOJ compared with other central banks grappling with inflation fears. Downward pressure from falling mobile phone fees weighed even more heavily on prices than in prior months.
What Bloomberg Economics Says...
“We expect output to pick up in October, supported by pent-up domestic demand unleashed by the lifting of the state of emergency. But a slowdown in China’s economy and supply chain restrictions will probably continue to weigh on production.”
--Yuki Masujima, economist
To read the full report, click here.
On a quarterly basis, Japanese production slid 3.7% from the prior three months. Excluding the early days of the pandemic, it was the worst quarter for Japanese manufacturing since the 2011 tsunami and will feed into gross domestic product figures that analysts expect will show Japan’s recovery slowed last quarter to about half the pace of the June period.
Ongoing gridlock at shipping ports from Los Angeles to Britain’s Felixstowe and slower growth in China may present continuing hurdles for Japan’s manufacturers as the world heads into the holiday shopping season.
Toyota, a bellwether for Japan’s key auto sector, cut its global production by more than a third in September compared with a year earlier, with the pullback among the country’s automakers expected to last through this month.
The damage could ease after that. Toyota set output targets for November above levels in recent years, even as it announced ongoing parts shortages.
Manufacturers surveyed in Friday’s report said they plan to increase output by 6.4% this month and by 5.7% in November, but the reported plans tend to be overly optimistic and an official at the economy ministry warned there’s a risk actual output could be lower. Semiconductor shortages could continue to hit supply chains, the official said.
On the plus side, a softer yen is helping boost profitability for carmakers and other exporters, a fact that BOJ Governor Haruhiko Kuroda flagged Thursday. He said the recent weakening of the yen would help the recovery.
Japan also looks set to emerge from its slump at home. With the country’s fourth state of emergency lifted, vaccination rates now above 70% and Covid cases down sharply, analysts see a consumer spending revival finally starting to take hold and fueling a quicker expansion toward year’s end.
Other reports Thursday showed continued strength in the labor market, with the unemployment rate holding at 2.8% in September and demand for workers exceeding supply by a slightly bigger margin.
“I do think that demand-side data like the jobs-to-applicant ratio will jump up from here,” said economist Atsushi Takeda at Itochu Research Institute. “Japan doesn’t have enough workers to begin with. Even during Covid, the unemployment rate held below 3% mostly, so it’ll be like throwing a match on tinder.”
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