Japan’s industrial output experienced a significant decline in January, marking the sharpest contraction since May 2020, according to government data released on Thursday. The downturn in production, particularly in the motor vehicle sector, has raised concerns about the resilience of an economy that slipped into recession late last year.
Data from the Ministry of Economy, Trade and Industry (METI) revealed that industrial output fell by 7.5% in January compared to the previous month. This figure was slightly worse than the median market forecast, which had predicted a 7.3% decline. The decline was widespread, affecting 14 out of the 15 industries surveyed by METI.
The ministry also downgraded its assessment of industrial output for the first time since July of the previous year, highlighting the daunting challenges facing the economy as it seeks to rebound from the recession at the end of last year.
Analysts at Capital Economics have interpreted the data as a signal that Japan’s gross domestic product (GDP) may contract again in the current quarter. Gabriel Ng, assistant economist at Capital Economics, remarked, “The plunge in industrial production in January suggests that GDP will fall yet again this quarter, which will add to the view that Japan’s economy is in recession.”
The most significant decline in production was observed in the motor vehicle sector, which plummeted by 17.8% in January compared to the previous month. Output decreases in regular passenger cars and electrical drive systems were key contributors to the overall decline in industrial output.
In January, Japanese automaker Toyota Motor took the decision to suspend shipments of certain models following the discovery of irregularities in certification tests for diesel engines developed by its affiliate, Toyota Industries. This move came amidst ongoing challenges within the automotive industry, with Toyota’s small-car unit Daihatsu also extending the suspension of production at its domestic plants due to misconduct related to collision-safety tests. While Daihatsu has begun a gradual resumption of operations this month, the impact of these disruptions on the overall automotive sector has been significant.
Kota Suzuki, an economist at Daiwa Securities, highlighted the severity of the situation, noting that the decline in automobile-related production represents a major setback for the Japanese economy. This setback comes at a time when the automotive industry had been a significant driver of industrial production, particularly amid sluggish global demand for goods.
The manufacturing of electrical machinery and information and communication electronics equipment, including lithium-ion batteries, also experienced a notable decline of 8.3% in January. Within this sector, there was a particularly sharp drop of 21.4% in the output of lithium-ion batteries. A METI official attributed this decline partly to adjustments in electric vehicle production worldwide, reflecting broader challenges within the automotive industry and its supply chain.
Manufacturers surveyed by Japan’s Ministry of Economy, Trade and Industry (METI) are anticipating a rebound in seasonally adjusted output, with an expected increase of 4.8% in February followed by a 2.0% rise in March. However, despite these projected gains, the magnitude of the forecasted production increases for February and March is not sufficient to fully counteract the significant decline witnessed in January, as noted by the METI official.
The earthquake that struck Japan’s Noto Peninsula on New Year’s Day did not have a substantial impact on manufacturers’ plans in January. However, the potential repercussions of the earthquake for February and subsequent months remain uncertain, highlighting ongoing challenges in the industrial sector.
Despite the concerns surrounding industrial production, separate data on Japanese retail sales offers a glimmer of hope. Retail sales in January saw a year-on-year increase of 2.3%, marking the 23rd consecutive month of growth. This growth in retail sales aligns with market expectations and suggests that consumption may serve as a mitigating factor against some of the pressure stemming from the industrial sector’s challenges.