Japan industrial production dropped -1.3% mom in January, worse than expectation of -0.7% mom. Output declined for the second month, after the -1.0% mom contraction in December. Production of cars and other motor parts slumped -17.2% mom, falling for the first time in four months.

Nevertheless according to survey by the Ministry of Economy, Trade and Industry (METI), output is expected to bounce back by 5.7% mom in February and 0.1% mom in March. But the forecasts were taken before Russia’s invasion of Ukraine, which impact is still unknown.

Retail sales rose 1.6% yoy, above expectation of 1.1% yoy, fourth consecutive month of expansion.

Japan’s headline CPI in February experienced a sharp slowdown from 4.3% yoy to 3.3% yoy, falling below the expected 4.1% yoy. CPI core (all items excluding food) dropped from 4.2% yoy to 3.1% yoy, meeting expectations. Meanwhile, CPI core-core (all items excluding food and energy) rose from 3.2% yoy to 3.5% yoy, surpassing the anticipated 3.4% yoy.

Despite the steep decline in CPI core from a 41-year high of 4.2% to 3.1%, the figure remains well above the Bank of Japan’s (BoJ) 2% target. The core-core reading, closely monitored by the BoJ as an indicator of domestic demand, reached its highest rate since January 1982.

The data suggests that incoming BoJ Governor Kazuo Ueda may need to address a shift from cost-push inflation to demand-driven inflation, which could prove more sustainable.

Japan PMI Manufacturing was finalized at 48.9 in December, down from November’s 49.0. That’s the lowest level since October 2020. S&P Global noted there were strong reductions in output volumes and order books. Input buying was cut at strongest rate since September 2020. Supply pressures were the least widespread since February 2021.

Laura Den man, Economist at S&P Global Market Intelligence, said: “December PMI data saw the Japanese manufacturing sector slip further into contraction territory in the final month of 2022. The downturn was largely centred around the current demand environment which is weak both internationally and domestically….

“At the same time, forward looking indicators are increasingly painting a gloomier picture for Japan’s manufacturing sector in the future. Companies have cut back input buying sharply, and business sentiment waned to a seven-month low.”

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