Steep drop in car production hits Japan factory output hard

Japan’s factory output slid sharply in May, as semiconductor shortages dented car production and manufacturers of all kinds pulled back amid yet another round of restrictions to contain the coronavirus.

Industrial production plunged 5.9% from April’s level, the trade ministry reported Wednesday in figures that were several percentage points worse than even the most pessimistic forecast among 30 surveyed analysts. The median projection was for a 2.1% drop.

Despite the worse-than-projected figures, the ministry stuck to its assessment that production is picking up. Manufacturers surveyed in the report said they plan to ramp up output this month by 9.1% and economists said May’s output drop probably had more to do with supply constraints than a falloff in demand.

Still, fears of a double-dip recession could grow if production gains don’t materialize in June. With consumers held back by continued restrictions to contain the virus, Japan needs factory output and exports this quarter in order to eke out growth after shrinking in the first three months of 2021.

Key Insights

• “Supply-side constraints are dragging down production, but the forecasts for June and July aren’t weak,” said economist Hiroaki Muto at Sumitomo Life Insurance Co. “I see autos hobbling along for a while more because of this, but demand itself is strong.”
• Surging car exports, with year-on-year shipments doubling last month, have been a key prop to the economy this year amid on-again-off-again virus restrictions that have hurt consumer spending. Plunging car production in May suggests those key shipments could also start to soften in months ahead.
• The sharp drop in auto production also signals that chip shortages may have finally started to squeeze Japan’s automakers after deft inventory management by Toyota in particular seemed to be helping minimize damage. Toyota’s total domestic output of about 274,000 units in May was down by more than 100,000 vehicles from two years earlier, before the pandemic hit.
• Still, the outlook should improve once supply bottlenecks clear and Japan’s accelerating vaccine drive helps revive domestic demand. Thursday’s Tankan survey by the central bank is forecast to show sentiment among big product makers jumping as companies start to see past the pandemic.

What Bloomberg Economics Says…

“The deeper-than-expected drop in Japan’s May industrial production reflected a hit from the extended state of emergency to contain the virus. Weaker domestic demand overwhelmed support from exports, which have remained strong.”

—Yuki Masujima, economist