As manufacturers struggled with rising raw material costs and the global economic slowdown, Japan’s factory output fell in September for the first time in four months. According to the government, this trend is expected to continue in October before picking up in November.

Retail sales increased for a seventh consecutive month, which is a positive development for the third-largest economy in the world and gives reason for optimism about a sustained increase in consumption following the easing of border controls related to COVID-19 earlier in October.

“While private consumption will continue its recovery from an easing COVID-19 situation and economic reopening, production may stall as worsening overseas economies hit Japanese exports,” said Masato Koike, senior economist at Dai-ichi Life Research Institute.

Government data released on Monday showed that factory output decreased 1.6% from a month earlier in September, exceeding the median estimate of 1.0% decline among economists. That came after an increase of 2.7% in August and was the first monthly decrease in the previous four months.

The overall index dropped as a result of a 12.4% decline in auto-related production, the industry’s steepest decline in eight months.

Since many Japanese companies have factories or suppliers in China due to COVID-19 lockdown measures, automakers and suppliers have struggled with a shortage of semiconductors. Last week, Reuters reported that Toyota Motor Corp (7203.T) had instructed its suppliers to lower their production goals for 2022.

“While auto production posted a large fall, a surge in the electronics sector’s inventory ratio was also conspicuous, indicating a semiconductor demand slowdown,” said Shintaro Inagaki, senior market economist at Mizuho Securities.

However, the chip supply crisis is disproportionately affecting the auto industry, clouding their production outlook, according to Inagaki.

The Ministry of Economy, Trade and Industry (METI) surveyed manufacturers who predicted that output would decrease by 0.4% in October and increase by 0.8% in November.

Supply bottlenecks brought on by COVID-19 are easing, but demand-side risks from a slowing global economy could reduce output, a METI official said at a media briefing, adding that manufacturers’ confidence in the business climate is still low.

The prices businesses charged one another increased 9.7% in September despite the fact that the annual consumer inflation rate was 3.0%.

A protracted decline in the value of the yen, which this month reached a 32-year low against the dollar, has increased the pressure on inflation in import-dependent Japan.

“We haven’t heard much from manufacturers that the weak yen is positive per se for their production,” the METI official said based on its factory output survey. “Rather, with rising procurement costs on the weak yen, coupled with (higher) energy prices, some firms have voiced concerns for their business conditions.”

In order to combat inflation, the government announced a 39 trillion yen ($264 billion) stimulus package on Friday. In addition, the Bank of Japan decided to maintain its ultra-loose monetary easing policy in order to support the economy, even with the risk of worsening yen weakness.

Retail sales increased 4.5% year over year in September, extending a recovery that began in March when the government ended domestic COVID-19 containment measures, according to separate data. Analysts had predicted growth of 4.1%.

Retail sales increased for a third consecutive month in September, rising 1.1% on a seasonally adjusted month-over-month basis.

After Japan loosened border controls on October 11 for foreign tourists, a further uptick is anticipated in the upcoming months.

“But we may not see a full return to pre-pandemic levels” soon, since Chinese tourists still face strict border controls back home, said Dai-ichi’s Koike.

According to economists surveyed by Reuters last week, the Japanese economy would grow by an annualized 2.0% in the months of October through December.

(Adapted from StraitsTImes.com)