Japan May Industrial Output Plunges as China Covid Lockdowns Worsen Supply Bottlenecks

–METI: June Output Likely to Rebound but Not Enough to Offset May Drop
–May Index of Industrial Production Hits Lowest Level Since August 2020

–METI Downgrades View for 2nd Straight Month: Output Weaker Vs. Pausing

–METI Repeats: To Watch Effects of Pandemic, Parts Shortages, Inflation, Ukraine War

By Max Sato

(MaceNews) – Japan’s industrial production posted a sharper-than-expected drop in May, hitting the lowest level since August 2020, as Covid lockdowns in Chinese cities including Shanghai, the trading hub, continued disrupting parts supplies to automakers, electronics firms and production machinery makers, preliminary data released Thursday by the Ministry of Economy, Trade and Industry showed.

The METI’s survey of producers indicate that output is likely to rebound in June to recover some of May’s sharp decline and rise further in July, probably on expectations that supply constraints will ease gradually and demand for air conditioners and other consumer electronics will remain strong as heat waves scorch many parts of Japan.   

The ministry downgraded its view for the second month in a row, saying industrial output is “weaker.” Last month it said output was “pausing,” compared to its previous assessment that it was “showing signs of a pickup.” The METI repeated that it will keep a close watch on the drag from the pandemic on domestic and global growth as well as parts and materials supply shortages, rising prices and developments in the Ukraine war.

The key points from the data:

* Industrial production plunged a seasonally adjusted 7.2% on the month in May, coming in much weaker than the median economist forecast of a 0.1% drop (the forecasts ranged from a 0.9% drop to a 1.0% gain). It was the second straight drop after falling 1.5% (revised from a 1.3% dip) in April, rising 0.3% in March and 2.0% in February and slipping 2.4% in January.

* The decline in May was widespread, in 13 of the 15 industries, led by lower output of vehicles (passenger cars, trucks, engines), electrical machines and communications equipment (lithium-ion batteries, air conditioners and car navigation systems) and production machinery.

* Based on its survey of manufacturers, METI projected that industrial production would jump 12.0% on month in June (revised up from the 8.9% rise forecast last month) and rise a further 2.5% in July. Adjusting the upward bias in output plans, METI forecast production would still mark a solid 4.9% in June, but not big enough to offset the 7.2% plunge in May. The two-month lockdown in Shanghai was lifted at the end of May, but China’s strict zero-Covid public health policy continues, making the outlook uncertain.

* The index of industrial production (100 in the 2015 base year) slumped to 88.3 in May from 95.1 in April, hitting the lowest level since August 2020, when the index also stood at 88.3 and was recovering from the recent bottom of 77.2 hit in May 2020. The latest figure is well below 99.1 seen in January 2020, when the pandemic hadn’t had a widespread impact yet.

* Production fell during the first wave of the pandemic in 2020. After a pickup later that year, more waves of infections caused logistical bottlenecks amid reopening demand and prompted parts supply delays from Southeast Asia, where lockdowns hit factory operations in August 2021. Later, easing supply bottlenecks pushed up production from October to December last year.

* From a year earlier, the index slipped 2.8% in May, marking the third straight drop after falling 4.9% (revised from a 4.8% fall) in April and dipping 1.7% in March and rising 0.5% in February. It was much weaker than the median economist forecast of a 4.2% rise. Production showed double-digit percentage year-on-year gains from April to July 2021 in reaction to the pandemic-depressed activity the previous year.

* Shipments also posted the second straight fall, down 4.3% on the month in May, after falling 0.3% in April, rising 0.6% in March and being unchanged in February. The recent lockdowns in China delayed shipments of passenger cars and auto parts, lithium-ion batteries and air conditioners, as well as bearings for motor vehicles. Shipments of precision measuring instruments fell in reaction to their rise in the previous month.

* Inventories marked the third straight monthly drop in May, down 0.1%, after falling 2.3% in April and 0.4% in March and rising 2.1% in February. The lower output of autos and auto parts prompted carmakers to use inventories.