Japan Quarterly Output Gain Signals Growth Return Before Omicron

(Bloomberg) -- Japan's industrial production rebounded last quarter, with the recovery in manufacturing likely helping restore economic growth at the end of 2021 before the omicron variant started its rapid spread.

A bounce back in auto output after a summer slowdown helped overall factory production climb 1% compared with the previous three months, the economy ministry reported Monday.

A separate report showed retail sales increased 2% from the prior quarter, as consumers returned to shops before the latest wave of the virus hit.

Still, weaker than expected production and retail sales figures in December after the emergence of omicron and a sharp escalation of infections this month are casting a shadow over the economy's performance this quarter.

Toyota Motor Corp. this month reported production cuts due in part to an outbreak at a supplier's factory in Japan. Widespread supply-chain disruptions around the world spurred the International Monetary Fund last week to predict slower global growth this year.

What Bloomberg Economics Says...
“The steeper-than-expected drop in Japan's industrial output in December reflected downward pressure on the economy from the rapid spread of Covid-19 infections...This suggests downside risk to output in the first quarter.”
--Yuki Masujima, economist
To read the full report, click here.

Overall production slipped in December a tad more than economists had expected, following a record gain a month earlier, and record cases of the virus at home and abroad, driven by the fast-spreading omicron variant, have clouded the outlook in recent weeks.

“Supply constraints are having a bigger impact than I had expected,” said economist Harumi Taguchi at IHS Markit. ‘The spread of the omicron variant is keeping workers at home, causing production to halt.”

An unexpected drop for retail sales last month may also be an early signal that omicron took some shine off last quarter's rebound. Receipts fell 1% in December, compared with analysts expectations for a fourth straight month of increases.

Covid Outbreak at Seat Belt Supplier Behind Toyota Output Cuts

Still, manufacturers surveyed by the economy ministry said they planned to raise output by 5.2% this month and another 2.2% in February. The results suggest a continued recovery in the factory sector, although reported plans tend to be overly optimistic.

Auto production increased 12% compared with the prior quarter, but supply chain problems are also far from clearing.

Factory output will be key to keeping Japanese growth going this quarter, given surging omicron cases that have triggered renewed restrictions across the country that are likely to deter shopping and eating out. With the 7-day average of infections now topping 70,000 nationally, quasi-emergencies were declared for Tokyo and most other major business centers this month.

“Domestic demand held up in December, but the omicron variant is hitting service businesses, especially restaurants and leisure-related ones,” IHS Markit's Taguchi said. “We may see service-related consumption to fall in the first quarter.”