JP: Industrial Production

Highlights

The effective blockade of the Strait of Hormuz by Washington and Tehran choked off factory output in Japan, squeezing the availability of naphtha cracked from light (low sulfur) crude, the source for ethylene, propylene and benzene among others. These petrochemicals are essential for producing plastics and resins that are used in most consumer and industrial goods ranging from vehicles and appliances to paint and food packages.

Industrial production shrank 0.5% on in March, closer to the low end of economist forecasts, posting its second straight drop after dipping 2.0% in February and rising 4.3% in January.

Looking ahead, the abrupt departure of the United Arab Emirates from the Organization of the Petroleum Exporting Countries, the 66-year-old cartel dictated by Saudi Arabia, which in the past worked as a swing producer in the interest of the United States, a close military ally, and remotely, Israel is often seen as influencing U.S. policy-making.

The UAE is bypassing the Strait of Hormuz, the crucial for oil and gas exports from the Mideast Gulf states to the world, particularly Asia, and shipping its Murban (high sulfur) crude out of its Fujairah port, but has been forced to cut its output by half in the wake of the Mideast conflict the broke out more than two months ago.

Japan relies 43.3% of its crude imports on the UAE, the largest supplier for the country, followed by Saudi Arabia (39.4%) and Kuwait (6.2%), a known OPEC quota cheater before Iraq invaded it in 1990. The long-standing UAE-Saudi feud is unlikely to strain Tokyo's tides with either of them as refineries buy oil and gas mostly under term deals.

The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would remain depressed, down 0.7% on the month in April, as the Iran war impact lingers and despite plans to raise output of computer chips and vehicles. At this point, the METI's forecast index points to a 2.2% increase, led by the auto industry, but that is before adjusting the data's upward bias.

In Q1, capital goods shipments (ex-transport equipment) rose a solid 1.8% on quarter after rebounding 1.6% in Q4 on the 1.2% dip in Q3, indicating capex in Q1 GDP were firmer (data due May. 19). The gross domestic product is expected by economists to post a solid increase following a 0.3% on quarter (1.3% annualized) in Q4, when strong business investment and sluggish but resilient consumption led the rebound from a 0.7% (2.6% annualized) contraction.

The ministry maintained its assessment that industrial output was"taking one step forward and one step back." The last change was made in the July 2024 report, when it upgraded its view.

Details:
Japan Mar industrial output -0.5% m/m (Feb revised to -2.0% from -2.1%); 2nd straight fall; median forecast +0.7% (range: -1.0% to +2.5%)

Japan Mar industrial output +2.3% y/y (Feb revised to +0.4% from +0.3%), 4th straight rise; median forecast +3.0% (range: +0.0% to +5.3%)

Japan METI keeps view: industrial output taking one step forward and one step back

Japan Jan-Mar industrial output +2.4% q/q vs. +0.3% q/q in Oct-Dec vs. -1.1% in July-Sept, -0.5% in Apr-June, 0.0% in Jan-Mar 2025

Japan METI forecast index: Apr industrial output -0.7% m/m (adjusted for upward bias), May +2.2%

Japan METI: Mar industrial output m/m drop led by polyethylene, rubber, boilers, steam turbines

Japan Mar industrial output: 8 out of 15 industries post fall, 6 are up, 1 flat

Japan Jan-Mar capital goods shipments (ex-transport equipment) +1.8% q/q vs. +1.6% in Oct-Dec, indicating capex in Q4 GDP may be firmer (data due May 19)

Market Consensus Before Announcement

Japan’s industrial output is expected to rebound in March, marking the first monthly increase in two months as the impact of Middle East geopolitical tensions appears limited and there are signs that exports picked up during the month.

Industrial production is seen rising 0.7 percent on the month in March after a revised 2.0 percent drop in February, compared with an initial 2.1 percent decline. The February contraction was initially driven by declines in trucks, engines, aluminum products and liquid crystal display panels. The subsequent upward revision reflected increases in pharmaceuticals and auto parts, while output in the food and tobacco industries fell.

On a year-on-year basis, output is expected to rise for a fourth consecutive month in March, increasing 3.0 percent after a revised 0.4 percent gain in February (initially 0.3 percent).

Separate data from the Ministry of Finance released on April 22 showed that Japan’s export values rose 11.7 percent y/y in March, marking a seventh straight increase and broadly in line with expectations. Exports reached a record ¥11.00 trillion, surpassing the previous high of ¥10.41 trillion set in December 2025.

Definition

Industrial Production measures the physical output of the nation's factories, mines and utilities. Factories manufacture various products, and the industrial production indexes have been prepared as a comprehensive indicator of wide-ranging production activities for such products and are regarded as some of the most important among economic indexes.

Description

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

Industrial production provides key industry data for this export-dependent economy. The data are issued twice a month-a preliminary estimate at the end of the month for the preceding month and a revised estimate about two weeks later. All products, whether sold domestically or abroad, are included in the calculation of industrial production. Industrial production is highly sensitive to the business cycle and can often predict future changes in employment, earnings and income. For these reasons industrial production is considered a reliable leading indicator that conveys information about the overall health of the economy. This report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.

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