Japan on track for modest recovery for now after factory output jump

TOKYO (BLOOMBERG) – Japan’s economy likely made a moderate recovery in the second quarter as manufacturing output rebounded strongly after China eased Covid-19 lockdown rules in Shanghai, reducing supply disruptions that had rippled through the region’s factories.

Output of cars, electronics parts and communications equipment led an 8.9 per cent gain in industrial production in June from the previous month’s sharp drop, according to the Ministry of Economy, Trade and Industry on Friday. That was more than double the gain forecast by economists.

Other data showed inflation in Tokyo continued to pick up speed beyond the central bank’s target while retail sales fell from relatively high levels a month earlier. The labour market showed some signs of tightening.

The solid rebound in production shows factory activity would not have dented the economy’s recovery in the second quarter by as much as feared.

But the slip in retail sales flashes an early warning signal that the pent-up demand that has been driving consumption may give way to concerns over rising prices and a re-escalation of virus cases in the summer quarter.

Japan’s economy is forecast to have grown at an annualised 3.6 per cent pace in the second quarter following a 0.5 per cent contraction in the previous quarter at the height of the Omicron wave. Gross domestic product figures will be released on Aug 15.

Fears over a global slowdown also cloud the economy’s path going ahead.

How the recovery in China evolves after the initial rebound will be among the key factors influencing Japan’s growth over the coming months. The US economy has, meanwhile, entered a technical recession as fears mount over the possibility of a wider-reaching slump.

Earlier this week, the International Monetary Fund (IMF) cut its global growth outlook for this year and next, warning that the world economy may soon be on the cusp of an outright recession. The IMF reduced its projection for China’s economy in 2022 by 1.1 percentage points to a 3.3 per cent expansion and cut Japan’s by 0.7 percentage point to 1.7 per cent.

While demand stored up during the pandemic is likely to offer some support for consumption in the domestic economy, the impact of soaring energy and food prices will likely limit spending.

Another factor likely to curtail shoppers’ appetite to splash out is the sharp resurgence of Covid-19 in Japan. Daily infections have topped 200,000 nationwide, an almost tenfold increase from the beginning of July.

For now, the government has not reinstalled restrictions on businesses and consumers to curb the spread as the number of serious cases and deaths has not risen to the same degree.