Japan’s July Factory Output Falls, Amplifying Manufacturer Pressures

Japan’s manufacturing sector encountered a larger-than-anticipated decline in factory output during July, marking a challenging beginning to the second half of the year. This slump is raising concerns for manufacturers, particularly in light of uncertainties regarding China’s growth trajectory and the global economic outlook.

Data from the Ministry of Economy, Trade and Industry revealed a notable 2.0 percent drop in industrial output for July compared to the previous month. This reading exceeded the median market projection of a 1.4 percent contraction, and it follows a substantial 2.4 percent expansion in June.

Notably, car production managed a 0.6 percent increase, attributed to improvements in supply chain limitations that had impacted automakers. Notable automotive giants like Toyota and Honda hold considerable sway over other Japanese manufacturers due to their extensive supplier networks.

On the flip side, output of electronic components and devices experienced a significant decline of 5.1 percent, while production machinery output decreased by 4.8 percent, contributing to the overall downward trend.

The weakening factory output statistics are consistent with lackluster July trade data, where Japan witnessed its exports contracting for the first time in over two years. This contraction was attributed to diminished global demand for items like light oil and chip-manufacturing equipment.

Industry surveys conducted by the ministry revealed that manufacturers anticipate a 2.6 percent rise in output for August and a subsequent 2.4 percent increase for September. However, these forecasts often tend to be more optimistic than realized outcomes.

Additional data disclosed a robust 6.8 percent expansion in Japanese retail sales during July year-on-year. This figure exceeded market forecasts of a 5.4 percent gain and extended the streak of growth, now spanning 17 consecutive months since March 2022. The recovery was propelled by Japan’s reopening economy and resurgent tourism following the challenges posed by the COVID-19 pandemic.

In comparison to the prior month, retail sales demonstrated a 2.1 percent increase in July, rebounding from a 0.6 percent decline observed in June.

Current indicators suggest that Japan’s economy, ranked as the world’s third-largest, is expected to contract at an annualized rate of 1.2 percent for the period from July to September. This forecast is derived from the latest Reuters poll, following the robust 6.0 percent expansion witnessed from April to June.