Japan’s worst factory output slump in two years heaps pressure on economy

By Daniel Leussink

TOKYO (Reuters) -Japan’s factory output posted the biggest monthly drop in two years in May as China’s COVID-19 lockdowns and semiconductor and other parts shortages hit manufacturers, adding more pressure on an economy struggling to mount a strong recovery.

The decline also highlights the challenge the world’s third-largest economy faces in overcoming supply disruptions and persistently high prices of raw materials and energy that analysts say could weaken global demand.

Factory output slumped a seasonally adjusted 7.2% in May from the previous month, official data showed on Thursday, as production of items such as cars as well as electrical and general-purpose machinery dropped sharply.

The decline, which marked the sharpest monthly reduction since a 10.5% month-on-month drop in May 2020, was much bigger than a 0.3% fall expected by economists in a Reuters poll.

“The plunge in industrial output in May suggests that Japan’s recovery is disappointing yet again,” said Marcel Thieliant, senior Japan economist at Capital Economics.

“The conventional wisdom is that supply shortages are the main culprit,” he added. “However, the fact that inventories were broadly stable despite plunging output suggests that weak demand is playing a role.”

The data comes a day after Toyota Motor Corp, the world’s largest automaker by sales, said it missed its already downgraded global production target for May.

Toyota produced 634,940 vehicles globally last month compared to its target of about 700,000, which it had lowered by 50,000 from 750,000 in mid-April due to pandemic curbs in Shanghai.

“Sluggishness in demand is likely to hurt output ahead,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“It’s very much possible that demand in the global economy will be sluggish once the impact of China’s lockdowns has completely worn off.”

Output likely saw the biggest impact from China’s lockdowns in May, a government official said, adding that it was likely to recover from June onwards as the fallout from the Chinese curbs gradually wears off.

While activity in Japan’s services sector is picking up thanks in part due to a modest post-pandemic spending rebound, the country’s manufacturing sector is facing pressure from parts and high-tech chip supply disruptions.

The government cut its assessment of industrial production, saying it was weakening, a downgrade from its previous view that output was stalling.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to rebound 12.0% in June, followed by a 2.5% expansion in July.

(Reporting by Daniel Leussink; Editing by Shri Navaratnam)