Japan’s manufacturing sector shrinks as Delta squeezes supply chains

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Production at Japanese factories fell slightly in July, as the highly contagious delta variant of the coronavirus weighs down global supply chains and slows the production of cars, chemicals and electronics.

Global industrial production fell 1.5%, after gaining 6.5% in June, the Economy Ministry reported on Tuesday. Economists were forecasting a drop of 2.5%. Manufacturers polled in the report said they plan to increase production this month and next.

Separate reports have shown strength in the job market that may have been helped by the temporary hiring associated with the Olympics. The unemployment rate edged down to 2.8% and a measure of demand for workers showed that job vacancies outnumbered job seekers since May 2020.

As the spread of the delta variant exacerbates the tightening of the global supply chain by disrupting shipments and forcing production to halt in Asia, economists said they viewed the problems as temporary and the recovery of Japan are expected to continue to limp this quarter as vaccination rates rise.

Key ideas

“The delta variant will be more under control at some point, so this effect will ultimately be temporary,” said economist Takeshi Minami of the Norinchukin Research Institute. He added that he expected continued growth in the economy in the third quarter, supported by exports and relatively resilient consumer spending.

Still, the country’s production could slow further if the pandemic and flea shortages continue. Toyota Motor Corp. announced earlier this month that it would suspend production at nearly all of its domestic factories for several days in September, forcing a 40% cut in production plans.

The latest wave of viruses is hitting manufacturers from multiple directions. At home, Japan is suffering its worst Covid-19 outbreak and an expanded state of emergency that could deter shopping somewhat, even as consumers get used to the situation.

Meanwhile, plant shutdowns and closures in places like Vietnam halt the flow of critical parts and components. Other disruptions include the closure of a key Chinese seaport this month and near-record shipping delays off Los Angeles and Long Beach.

What Bloomberg Economics Says …

“An unexpected tightening in the Japanese labor market in July was prompted by demand for workers in the manufacturing sector as well as temporary needs related to the Tokyo Olympics. But the details suggest the weakness persists. The number of unemployed has fallen, but the number of people who have lost their jobs involuntarily has increased ”, Yuki Masujima, economist Bloomberg News


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