MNI POLICY: Japan Feb Factory Output Posts 1st Drop for 2021

Japan's industrial production posted the first monthly drop for the year in February and production is expected to be weaker in the coming months, increasing pressure on the Bank of Japan to review its recovery scenario in April.

Industrial production fell 2.1% m/m in February following a 4.3% rise in January, weighed down by lower production of motor vehicles, electrical machinery and information and communication electronic equipment.

Despite a bright production forecast, bank officials now expect downward pressure on industrial production for the first quarter to be greater than they expected in January, due to the shortage of semiconductors. They expect production to remain weak in the second quarter.

With chipmaker Renesas Electronics not expected to achieve a full recovery from its recent factory fire until mid-July, automakers are considering reducing production, which in turn will affect other industries.

Bank officials expect weaker production to be temporary, and they don't expect it to worsen the underlying trend of production, but they cannot accurately forsee the magnitude of the production drop in the coming months.

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 to the view that industrial production and exports have increased.

The BOJ's latest assessment is that "Industrial production is likely to decelerate its pace of increase in the short run due to a peaking-out of pent-up demand for automobiles."

"However, it is expected to continue increasing, mainly supported by a global recovery in demand for business fixed investment and steady digital-related demand," the bank said.

Motor vehicle production fell 8.8% m/m in February for the first drop in two months following +3.5% in January.

Transport equipment accounts for about 20% of Japan's total output with the auto industry alone accounting for about 3% of Japan's GDP.

Shipments of capital goods excluding transport equipment rose 2.9% m/m in February for the second straight rise following +8.9% in January, indicating demand for capital investment remained solid.

The government left its assessment unchanged from the previous month, noting "industrial production is recovering" and sees production falling 1.9% (revised from -6.1%) in March before rising 9.3% in May.

However, the shortage of semiconductors caused by Renesas Electronics, the Japanese chipmaker whose plant was severely damaged in a recent fire, was not incorporated into the forecast.

Adjusting the upward bias in output plans, forecast production would fall 1.4% m/m in March. Based on this assumption, Q1 production would rise 1.4% q/q for the third straight rise following Q4's +6.4% rise and Q3's +8.7%.