Industrial output across Japan continued to decline for the second consecutive month during August, especially hitting car production as outbreaks of COVID-19 across parts of Asia led to supply chain disruptions and drove shortages in semiconductors. Factory output fell by 3.2% MoM in August, a more severe contraction than the 1.5% drop seen in the previous month and economists’ forecast which was for a contraction by only 0.5% instead.

Leading car manufacturers in the country have had to curb production owing to shortage in the supply of components. According to industry experts, the supply chain disruptions could hurt production until at least October, keeping the automotive industry and the overall manufacturing sector under pressure for the next couple of months.

In a recent survey by the government, manufacturing firms expect their output to increase by 0.2% in September and post a sharp rebound, rising by as much as 6.8% in October. Despite the somewhat optimistic expectations, the government has revised its forecast for industrial production lower for the first time since April 2020, stating that recovery in the industrial sector was stalling.

In more worrying news for the Japanese economy, retail sales also registered a decline for the first time in six months during August, with consumers turning wary about spending amid a resurgence in COVID-19 cases and ensuing restrictions. Retail sales across the world’s third largest economy dropped by 3.2% YoY during the month of August against economists’ expectations for a 1% drop instead.

Unlike other economies in the West, Japan has been slow to recover from the coronavirus crisis, hit by multiple waves while the slow rollout of the COVID-19 vaccine prolongs the effects of the pandemic on it. Economists expect Japan’s GDP to touch 1.2% for Q3 2021, well below the pace of growth seen in other leading economies, amid extension of restrictions and curbs to contain the spread of infections.