Japan factory output falls at the fastest pace in nearly 4 years

Japan’s January factory output fell at the fastest pace since May 2020, government data showed on Thursday, as a production downturn in motor vehicles adds to concerns about the fragility of an economy that slipped into recession late last year.

Industrial output fell 7.5% in January from the previous month, data from the Ministry of Economy, Trade and Industry (METI) showed. It was slightly worse than the median market forecast for a 7.3% drop, with output sliding in 14 of the 15 industries surveyed by METI.

The ministry also downgraded its assessment of industrial output for the first time since July last year, laying bare the challenges for the economy as it tries to recover from a recession at the end of last year.

Analysts at Capital Economics say the data suggest GDP may have contracted again in the current quarter.

“The plunge in industrial production January suggests that GDP will fall yet again this quarter, which will add to the view that Japan’s economy is in recession,” said Gabriel Ng, assistant economist at Capital Economics.

Production declined the most in motor vehicles, down 17.8% in January from the previous month. Output decreases in regular passenger cars and electrical drives systems pulled down the overall figures.

Japanese automaker Toyota Motor in January suspended shipments of some models after finding irregularities in certification tests for diesel engines developed by affiliate Toyota Industries.

Toyota’s small-car unit Daihatsu also continued to suspend production at its domestic plants through January due to misconduct related to rigged collision-safety tests. The company has started a gradual resumption of operations this month.

“The drop in automobile-related production, which had remained exceptionally strong amid stagnant (industrial) production due to weak global demand for goods, is a major blow to the Japanese economy,” said Kota Suzuki, an economist at Daiwa Securities.

The manufacturing of electrical machinery and information and communication electronics equipment, including lithium-ion battery, also sank 8.3%.

The 21.4% plunge in lithium-ion battery output was partly due to electric vehicle production adjustments worldwide, a METI official said.

Manufacturers surveyed by the industry ministry expect seasonally adjusted output to increase 4.8% in February and rise 2.0% in March.

However, the forecast production gains for February and March are not large enough to offset January’s drop, the METI official said.

A powerful earthquake that hit Japan’s Noto Peninsula on New Year’s Day appears to have had limited impact on manufacturers’ plans in January, although the potential effect for February and beyond is unclear, the official added.

Separate data on Japanese retail sales offered hope that consumption will help offset some of the pressure coming from the industrial sector. Sales rose 2.3% in January year-on-year for a 23rd straight month of increases, and matched the median market forecast.