Japan’s factory output slumps in worrying sign for economy

Factory production falls 1.3 percent in April as China’s lockdowns and the Ukraine war weigh on manufacturers.

Japan’s factory output fell sharply last month as China’s draconian “zero COVID” policies and supply chain blockages hampered manufacturing and dampened prospects for growth in the world’s third-largest economy.

Factory production fell 1.3 percent in April compared with the previous month, government data showed on Tuesday, amid steep declines in the manufacture of items including electronic parts and machinery.

The weak figures, which mark the first decrease in three months, came a day after Toyota Motor Corp missed its global production target for April after output declined more than 9 percent year-on-year.

Toyota, the world’s biggest carmaker by sales, last week downgraded its global production target for June while signalling the possibility of slashing production for the whole year.

Shigeto Nagai, head of Japan economics at Oxford Economics, told Al Jazeera he sees waning domestic demand, especially private consumption, as a bigger risk to Japan’s economy than slowing industrial activity.

“Although we are now seeing an impressive recovery driven by pent-up demand, the strength of consumption will be severely constrained by a sharp squeeze in real household income caused by a combination of higher inflation and stagnant wage growth,” Nagai said.

“The weak yen is also clearly a negative to households and consumption, which is supposed to take a lead in the coming recovery after the coronavirus.”

Despite slowing industrial activity, separate retail sales and unemployment figures showed healthy gains.

Retail sales posted the largest rise in nearly a year as consumers ramped up spending after the government eased COVID-19 restrictions, despite rising inflation that threatened to sap demand. Retail sales grew 2.9 percent in April, the biggest jump since May 2021 and well ahead of market forecasts. The jobless rate stood at 2.5 percent, the lowest in more than two years.

“We ought to be on the watch for tighter labour market conditions leading to wage growth, which is the key that the Bank of Japan has been looking for to gauge a sustainable inflation trend,” ING economists said in a note.

While Japan’s services sector has rebounded from the COVID-19 pandemic, manufacturing has faced disruptions and higher material prices due to China’s ongoing lockdowns and Russia’s war in Ukraine.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expect output to return to growth in May, growing 4.8 percent, followed by a 8.9 percent advance in June.

“I think the slowdown in industrial production today is temporary mainly reflecting disruptions in supply chains and production activities by COVID-related lockdowns in China,” Nagai said.

“Japan’s exports and production will continue to be affected by the lockdowns for another few months but will regain momentum thereafter. We have limited concern about the prospect of Japan’s manufacturing activities amid strong demand for high-end capital goods and autos. The weak yen will also help exports.”