The worst decline in Japanese factory production in two years increases pressure on the economy

Smoke rises from a factory during sunset in the Keihin Industrial Estate in Kawasaki, Japan, January 16, 2017. REUTERS/Toru Hanai/

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  • May production may fall 7.2% m/m, much weaker than expected
  • Decline in the production of cars, electrical and general machinery
  • Manufacturers see production rebound in June and July

TOKYO (Reuters) – Japan’s factory production posted the biggest monthly drop in two years in May, as shutdowns, semiconductor shortages and other parts of China hit manufacturers, adding pressure to an economy struggling to make a solid recovery.

The downturn also highlights the challenge for the world’s third-largest economy in overcoming supply disruptions and persistently high prices for raw materials and energy, which analysts say could dampen global demand.

Official data on Thursday showed factory output fell 7.2%, seasonally adjusted, in May from the previous month, as production of items such as cars as well as electrical and general-purpose machinery fell sharply.

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The drop, which represented the largest monthly decline since a 10.5% month-on-month decline in May 2020, was much larger than the 0.3% drop forecast by economists in a Reuters poll.

“The drop in industrial production in May suggests that Japan’s recovery is once again disappointing,” said Marcel Thilliant, chief Japanese economist at Capital Economics.

“The conventional wisdom is that the lack of supplies is the main cause,” he added. “However, the fact that stocks were broadly stable despite lower production suggests that weak demand plays a role.”

The data comes a day after Toyota Motor Corp (7203.T), the world’s largest automaker by sales, said it missed an already lowered global production target for May. Read more

Toyota produced 634,940 vehicles globally last month, compared with its goal of about 700,000, which it cut by 50,000 from 750,000 in mid-April due to epidemic restrictions in Shanghai.

“Slowing demand is likely to hurt production in the future,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“It is very likely that demand in the global economy will slow once the impact of the lockdowns in China has completely worn off.”

Production likely saw the biggest impact from the Chinese shutdowns in May, a government official said, adding that it was likely to recover from June onwards as the fallout from the Chinese restrictions gradually faded.

While activity in Japan’s services sector is picking up thanks in part to a modest recovery in spending after the pandemic, the country’s manufacturing sector is facing pressure from spare parts and disruptions in the supply of high-tech chips.

The government lowered its assessment of industrial production, saying it was declining, a reversal from its earlier view that production was slowing.

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

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(Reporting by Daniel Losink) Editing by Shree Navaratnam

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