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  • Quarterly decline in industrial output steepest since 2020
  • Economists see slight economic contraction in January-March

Japan’s factory output rebounded in March from a dismal start to the year, with the quarterly figure registering the weakest performance since the height of the pandemic in a sign the economy may have contracted during the period.

Industrial production rose 3.8% in March from February, as demand picked up after two straight months of declines, industry ministry data showed Tuesday. The result exceeded the consensus forecast of a 3.3% gain.

The improvement in output comes after weakness early in the first quarter, as a New Year’s Day earthquake northwest of Tokyo and output suspensions in the auto industry weighed on activity from January. On a quarterly basis, output slumped 5.4% in the January-March period, the worst performance since the second quarter of 2020.

“The auto safety scandal caused a sharp drop in production in January and February,” said Taro Saito, head of economic research at NLI Research Institute. “We can finally confirm a recovery from that.”

Economists forecast Japan’s economy contracted a bit in the first quarter of 2024 after eking out growth in the last period of 2023. Saito said he believes the economy will return to growth in the second period. The ministry predicted factory production would rise 4.1% in April and gain 4.4% in May.

Other reports Tuesday showed retail sales fell 1.2% from the previous month, while the labor market remained tight.

The readings of production, retail sales and the labor market underscore the fragile state of Japan’s economic recovery, with domestic consumption one of the prime concerns.

Policymakers are hopeful that strong wage hikes in the current fiscal year will spur consumption, supporting growth and demand-led price gains, in a virtuous cycle that would allow domestic demand to become the main driver for the economy.

What Bloomberg Economics Says…

“The rebound in Japan’s March industrial production won’t fill the crater in January-February, when the auto sector was slammed by a temporary output halt at Daihatsu Motor Co. due to a safety scandal. That will put a small dent in 1Q24 GDP.”

 Taro Kimura, economist

Click here to read the full report

Japan’s labor market showed further signs of tightness in March, driven by a manpower shortage across a swath of sectors. The job-to-applicants ratio edged higher to 1.28, topping economists’ expectations for the gauge to be unchanged at 1.26, the labor ministry reported, while the unemployment rate held steady at 2.6%, according to the ministry of internal affairs.

External demand has been the main engine of growth recently. Exports grew for a fourth consecutive month in March as the weak yen provided a tailwind and demand in China picked up.

There are risks to the outlook. The International Monetary Fund raised its expectations for global economic growth while warning that the outlook remains fragile due to persistent inflation and geopolitical risks.

The World Trade Organization offered a similar assessment last month, flagging expectations for a gradual recovery in global commerce in the early months of 2024 while citing the possibility gains could evaporate because of regional conflicts and geopolitical tensions.

The yen’s plunge to a fresh 34-year low versus the dollar could spur a resurgence of cost—push inflation via higher costs for imports of food and energy. If so, it could prompt households to tighten their budgets further, casting doubts on hopes for a virtuous cycle.

Written by:  and  @Bloomberg

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