Japan quarterly output gain signals growth return before Omicron; consumer confidence falls in January

Tokyo

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 per cent compared with the previous three months, the economy ministry reported on Monday (Jan 31).

A separate report showed retail sales increased 2 per cent 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 last month are casting a shadow over the economy's performance this quarter.

Toyota Motor last 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.

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 in December may also be an early signal that Omicron took some shine off last quarter's rebound. Receipts fell 1 per cent in December, compared with analysts expectations for a fourth straight month of increases.

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

Auto production increased 12 per cent 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."

Separately, Japan's consumer sentiment fell by the biggest margin since the height of the pandemic crisis in January, as Covid infections rocketed with the spread of the Omicron variant and as inflation expectations continued to tick up.

The consumer confidence index declined by 2.4 to 36.7, the biggest drop since April 2020, the Cabinet Office reported on Monday. That compared with a 37.0 estimate by analysts. The reading was the lowest since August, during a summer wave of infections.

The result shows how fast the new variant is weighing on the mood of consumers as daily nation-wide cases jumped from less than 500 at the beginning of January to over 80,000. The government has reinstated quasi-emergency measures in most parts of the nation to try to contain the latest wave of infections.

The impact on the jobs market was the biggest cause of concern in the sentiment survey, with just over half of respondents saying they expected employment conditions to worsen. Higher prices for energy and household necessities have also been hitting consumers.

Just under 90 per cent of households surveyed said they expected prices to go up, the highest proportion since 2014. The government is trying to ease the pain for consumers with subsidies to offset rising petrol prices. BLOOMBERG