Japan's IP Falls Again

Japan's industrial output fell by 1% in January after tumbling 0.8% in December. Still, output has a strong 18.7% (annualized) gain over three months on the strength of a 6.3% monthly gain in November. However, output is falling by 1.3% over 12 months and by 6.8% over six months.

In the quarter-to-date industrial output is up at a 2.6% rate, but that is all from the momentum generated back in November.

Manufacturing is following the same pattern as overall IP on this timeline.

Sectors show declines in consumer goods output and in output of intermediate goods in January as well as in December. Both also showed very sharp monthly gains in November. Both sectors show double-digit annualized growth rates of gain in the last three months while their growth rates are negative over six months and 12 months.

Investment goods are off on their own tangent. The output of investment goods rose by 1.8% in January, fell by 2.7% in December and rose by 2.8% in November. Investment goods show a gain in output over 12 months, a fall in double digits over six months and a strong but single-digit annualized gain over three months.

In the quarter-to-date, output falls for consumer goods but is rising for intermediate goods and for investment goods.

The mining sector shows output increases in two of the last three months but logs a drop over three months, six months and 12 months. And those declines are increasing more severely. Mining output also is falling in the quarter-to-date.

Looking at output changes since before Covid struck, the headline, manufacturing and all sectors are still lower on balance. Japan has not recovered to its pre-Covid level of activity and that means since that a two-year period there has been no growth either as would normally occur for a two-year period.

PMI trends are not encouraging... Separately, Japan's manufacturing PMI ticked higher in January but then dropped back in February. Japan's services PMI fell in January and slipped below the breakeven 50.0 mark. It has since fallen even further below breakeven to show contraction in the service sector.

Japan has been in the thrall of a Covid outbreak infections that have risen sharply. In early-January infections picked up and peaked in early-February. Although there has since been a rundown in the number of infections, the degree of infection is still quite high. Japan has also seen a spike to a new high in its death curve. That curve is spiking in later February.

These trends explain why Japan is still struggling with its economic performance. And even though Omicron is less of a killing disease, Japan has seen its death curve rise to new highs compared to earlier cycles in the Covid process.

Japan is a demonstration that the rest of the world may be seeing different risks with different timing than in the U.S. and Europe. Hong Kong has also been experiencing a new spike and record high infections. Covid is still out there wreaking its special band of havoc. But we are being distracted by various controversies about what central banks will do, and by rising inflation and by the invasion of Ukraine. All those events are important. Policy is going to have to come to grips with a number of very significant cross currents. Making policy remains a treacherous enterprise in this environment.