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Economy in Brief

Japan's Industrial Output Drops Back
by Robert Brusca  April 28, 2022

Industrial output in Japan in March fell by 0.5% as output in the consumer goods and intermediate goods sectors contracted even as investment goods output increased. Total output in Japan has fallen in two of the last three months; manufacturing output has risen in two of the last three months. Consumer goods output in manufacturing has fallen in two of the last three months; the same is true for intermediate goods and investment goods as well. Although for investment goods, the output pattern is different with an improvement in March and declines in both January and February. For consumer and intermediate goods, the increase in output came in February and it is flanked by declines in March and January. Monthly output trends in Japan are uneven.

Over three months total output is falling at a 1.6% annual rate; manufacturing output is falling at a 0.4% annual rate. Consumer goods output is declining at a 7.9% annual rate and intermediate goods output is falling at a 1.2% annual rate, but investment goods output is increasing at a 0.8% annual rate.

Still, the picture here is clear; even though investment goods are showing some output increase over three months, it's a weak increase. Meanwhile, consumer goods and intermediate goods are logging clear declines with substantial weakness being registered in the consumer sector. No substantial sector in manufacturing is strong.

Turning to sequential growth rates, total industry output falls over 12 months, rises over six months then falls again over three months. Manufacturing displays the same pattern. Looking at manufacturing sectors, consumer goods show a decline over 12 months and log a decline over three months - the same as intermediate goods- with both of those sectors showing an increase over six months. Investment goods show an increase in output over 12 months, a decline over six months and then a slight increase over three months – just the opposite result. These are very choppy patterns; they are not exactly in sync across manufacturing and imply that output is undergoing various kinds of stresses. There is no clear sequential pattern to manufacturing output trends in Japan – apart from their general weakness.

Japan's mining sector shows declines in two of the most recent three months; it also shows declines over 12 months, six months and three months. That sector is clearly weak despite a situation globally in which commodity prices are being boosted and there is a shortage of minerals. But in Japan, mining is under stress; in fact, it is showing progressive weakness with weakness getting worse moving from horizons of 12-months to six-months, to three-months.

Utilities show a substantial decline in output in March, falling by 4.4% after logging increases in February and in January. Still, utilities output is declining at a 5.1% annual rate over three months although it is up by 2.3% over 12 months and rises at a 5.7% annual rate over six months. The recent weakness for utilities in Japan is somewhat surprising and disturbing since utilities tends to have more steady output as they reflect the ongoing flow of services to households and the usage of utility services by manufacturing and the services sector. This sort of energy is not so easily storable.

The first quarter data are completed with entries this month for March. For the quarter, the numbers look good much better than three-month growth rates because of the averaging process and the timing of the data for the quarterly calculations: total industry output is increasing at a 3.3% pace and manufacturing is up at a 3.4% pace. Consumer goods output in the quarter, however, falls at a 1.7% pace. Intermediate goods output advances at a 2% pace while investment goods output pulls back falling at a 3.7% annual rate. Mining shows an 8% annual rate decline in the quarter; utilities output is up at an 8.1% annual rate in the quarter- smoothing over the weakness from March. All sectors are well off their respective cycle peaks.

Looking further into the patterns of Japanese industry, comparing output where it was before COVID struck globally, total industry and manufacturing output both are still below those levels; all three manufacturing sectors: consumer goods, intermediate goods, and investment goods, show output levels below what they were in January 2020. Mining output is lower by a substantial amount, 7.1%. Utilities output, however, is 3.6% higher than it was in January 2020.

Japan is in a difficult period. The economy has been under stress. Its main trading partner China has a zero COVID policy that is making it a difficult export market and holding back growth throughout Asia. The stresses on Japan have weakened the yen which has been falling to a substantial low and, while the finance minister continues to issue statements indicating that Japan will defend the yen ‘as appropriate,' there doesn't appear to be any will on the part of Japanese authorities to stop the yen weakness just yet. What makes this different from other episodes is there is no international disharmony over it. The yen is falling and authorities in U.S. are not objecting to it. Meanwhile, the Bank of Japan has had all eyes turned to it wondering if monetary policy would be used to defend the yen. The BOJ, quite contrarily, has reasserted its determination to purchase securities aggressively to enforce its current low interest rate policy - no defense of the yen there.

For the moment, Japan's economy remains weak. The Asian economy continues to struggle, held back by a zero covid policy in China. The yen is weakening, and the Bank of Japan still seeks economic stimulus for an economy that is underperforming and where inflation is still low by global standards. It's as though Japan lives in a different world than the rest of the G7 countries. Its policy challenges are certainly different.

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