Japan March factory output slumps, indicating Q1 GDP contraction

26, Apr. 2019

TOKYO, NNA - Factory output in Japan fell more than expected in March to a 14-month low as slower global growth dampened demand for passenger cars and chip-making equipment, prompting the government to downgrade its output assessment and indicating a GDP contraction in the first quarter.

The Ministry of Economy, Trade and Industry released preliminary industrial production data on Friday.

Key points:

―― Industrial production in March fell 0.9 percent from the previous month, coming in much weaker than the median economist forecast of a 0.1 percent drop, as Japanese manufacturers appear to be delaying capital investment plans in the wake of a Chinese slowdown and disappointing sales of iPhones.

―― The March output decrease followed a modest 0.7 percent rebound in February from a sharp 2.5 percent drop in January. Output has been trending down in a pattern of ups and downs. Shipments dipped 0.6 percent, the first decline in two months.

―― The ministry downgraded its view on factory output, saying it “has been weak,” compared to its previous view that it was “marking time.” The March Index of Industrial Production at 101.9 was the lowest since 101.4 seen in January 2018. The index for the January-March quarter plunged 2.6 percent on quarter to a two-year low of 102.3.

―― Based on its survey of manufacturers, METI projected industrial

production would rise 2.7 percent on month in April (revised up from +2.7 percent forecast last month) and gain a further 3.6 percent in May, but adjusting for the upward bias in output plans, METI forecast production would fall 0.5 percent in April.

Takeaway:

―― The sharp 2.6 percent drop in Q1 factory output indicates that Japan’s gross domestic product, due out on May 20, will show a slight decline in January-March, probably at an annualized pace of 0.4 to 0.5 percent.

―― The 0.9 percent fall in March output bodes ill for business and consumer sentiment and is likely to dampen the coincident index for March, due on May 13, and lead the Cabinet Office to downgrade its overall view and say the economy is “worsening,” compared to the current view that business conditions are shifting toward a downtrend.