MNI: Japan May Factory Output Posts 1st Drop in 3 Months

Japan's industrial production posted the first m/m drop in three months in May but production is expected to rise q/q in the second quarter, supporting the Bank of Japan's view on a moderate recovery.

Industrial production fell 5.9% m/m in May following +2.9% in April due to the lower production of motor vehicles, production machinery and electrical machinery as well as information and communication electronics equipment.

The May drop was consistent with weak real exports for the month (-0.2% m/m in May vs. +2.5% in April).

The government left its assessment unchanged from the previous month, noting "industrial production is recovering" and it sees production rising 9.1% (revised up from +5.0%) in June before falling 1.4% in July.

Adjusting the upward bias in output plans, forecast production would rise 5.4% m/m in June. Based on this assumption, Q2 production would rise 1.0% q/q for the fourth straight rise following Q1's +2.9%.

Industrial output remains a key piece of data to aid BOJ economists assess the outlook, as it reflects both external and domestic demand, with the BOJ keeping the view that industrial production and exports have increased.

As for the near-term outlook, the BOJ expects the pace of increase to decelerate in the medium term, impacted by such factors as a shortage of semiconductors.

But the BOJ expected industrial production to continue increasing, mainly supported by a global recovery in demand for business fixed investment and steady digital-related demand.

Production of electronic parts and devices fell 0.5% m/m in May but the weak data was a reaction to strong production in April (+5.5%).

Shipments of capital goods excluding transport equipment, which are used for capital investment, fell 3.0% m/m in May but BOJ officials were little influenced by the weak data following +14.5% in April.

Production of automobiles fell 19.4% m/m in May following -1.0% in April but the drop in automobile production was widely expected in the wake of the semiconductor shortage.

Automobile makers have decided to cut their production in the wake of the semiconductor shortages, reducing exports of automobiles to the U.S., which accounts for about 30% of Japan's exports to the U.S.

Production of automobiles are expected to rise 14.2% m/m in June before rising 7.9% in July, according to government forecasts.