Japan’s industrial output declines for third month in a row

Japan’s industrial production fell 0.1% in November from the previous month, marking the third consecutive month of decline, according to government data released on Wednesday. The drop was smaller than the median market forecast of a 0.3% fall, but still reflected the impact of a weakening global demand and supply chain disruptions on the country’s machinery and auto sectors.

The output of general machinery slipped 7.9%, while that of production machinery decreased 5.7%, driving down the overall index in November. The output of auto products was also down 0.8%. A Ministry of Economy, Trade, and Industry (METI) official told a media briefing that machines to make semiconductors or flat-panel displays saw lower demand across overseas markets such as China, Europe, and North America.

METI cut its assessment of industrial output for a second straight month, saying “production is weakening”. Manufacturers surveyed by METI expect output to gain 2.8% in December and decrease 0.6% in January, but production could continue falling, the official added, saying companies tend to downgrade their production plans afterward in recent months.

Japan’s industrial output declines for third month in a row
Japan’s industrial output declines for third month in a row

Inflation and wage hikes pose challenges for Japan’s post-pandemic recovery

The weak production bodes ill for Japanese firms as they face growing calls to raise workers’ pay to counter inflation, seen as essential for the post-pandemic growth of the world’s third-largest economy. Japan’s consumer prices rose 3.1% in November from a year earlier, the highest level since 1982, driven by higher energy and food costs.

Substantial wage hikes are seen as necessary for the Bank of Japan (BOJ)’s exit from ultra-loose easing, but businesses are not sanguine about the outlook. Last week, the government warned of supply chain risks from China’s COVID-19 surge, while the BOJ’s surprise tweak to its yield control policy stoked uncertainties for some lenders.

Japanese companies head into annual labor talks for 2023 early next year, with Prime Minister Fumio Kishida urging them to offer wage increases of at least 3%. However, some analysts doubt whether firms will comply, given the uncertain prospects for profits and exports.

Japan’s economy expected to rebound in fourth quarter, but risks remain

Despite the slump in industrial output, economists expect Japan to grow an annualized 3.3% in October-December on robust domestic demand, the latest Reuters poll showed. The economy contracted 3.6% in July-September, as a surge in COVID-19 cases and supply bottlenecks weighed on consumption and exports.

Japan has largely contained the pandemic, with more than 80% of its population fully vaccinated and most social restrictions lifted. This has boosted consumer confidence and spending, as well as tourism and service activities. Retail sales rose 2.4% year-on-year in November, although they fell 0.4% month-on-month for the first time in five months.

However, Japan still faces several risks that could derail its recovery, such as the emergence of the Omicron variant, the slowdown in China and other major trading partners, and the geopolitical tensions over Taiwan and Ukraine. The government and the BOJ have pledged to maintain their fiscal and monetary stimulus to support the economy, but some analysts warn that they may have limited room to maneuver in the face of rising inflation and debt.

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